On October 16, 2023, the Supreme Court of India delivered a landmark judgment that is poised to trigger a transformative shift in the accounting practices of telecom companies across the nation. This pivotal ruling fundamentally restricts telecom operators from categorizing their annual obligations for license fee payments as operating expenses, thereby disallowing them from deducting these fees from their gross revenues when calculating their EBITDA. The EBITDA figure plays a crucial role in determining their tax liability, factoring in interest expenses and depreciation costs. It’s essential to note that Indian telecom companies are obligated to pay two types of license fees: an initial nominal fee for license acquisition and a recurring yearly fee, calculated as a percentage of their Adjusted Gross Revenue (AGR), to keep their license operational.
The objective of this article is to assess how this new accounting approach will impact the operators’ cash flow and whether there are any inherent flaws which might not align fundamentally with the conventional accounting practice adopted by companies for dealing with such situations.
