The Hindu Business Line : The substitution effect on Access Deficit Charge

What are the implications of the ADC from a public finance point of view? First is the substitution effect. The ADC is analogous to a commodity-specific tax, being the charge on a specific telecom service (international long distance).

THE Access Deficit Charge (ADC) has come to the limelight again because of the recent announcement by the IT and Communications Minister on the Government's intention to shift to a revenue-sharing regime from per minute charging scheme now.

An ADC is payable to the basic service providers (mainly the government-owned BSNL) on a per minute basis by operators of cellular, unified access, national and international long-distance services. The Telecom Regulatory Authority of India (TRAI) introduced the ADC in its regulation in 2003, to compensate the basic service providers for providing high-cost fixed-line connectivity at low rentals, especially in the rural areas.

The ADC for incoming international calls to a mobile phone is now Rs 3.25 a minute compared to 30 paise for a local call. This is why you may receive a call from, say, Sydney but your mobile phone displays only a local number.

This phenomenon represents what is popularly known in telecom as masquerading of an international call as a local one. This is done by some of the international long distance (ILD) operators to avoid payment of ADC. By so camouflaging an international call as a local one, the ILD operator can save up to Rs 2.95 per minute of call usage.

What are the implications of the ADC from a public finance point of view?

First is the substitution effect. The ADC is analogous to a commodity-specific tax, being the charge on a specific telecom service (international long distance).

Assuming that demand for international phone calls is elastic and assuming, at first, that companies are honest and pay the charge, the imposition of the ADC will make such calls more expensive for consumers. But the consumer has cheaper alternatives such as electronic mail, chat, or Internet telephony call services.

In all such cases, where there is the possibility of substitution, according to public finance theory, the imposition of the ADC can cause deadweight loss, since there is a loss to the consumer, who substitutes the now relatively cheaper, lesser quality service such as Internet telephony for international calls. Since, in this case, the ADC-levied service is not being used, the revenue earned by the government operator is also reduced.

The second effect of the ADC is the evasion of these charges by the operators through masquerading. There could be several reasons for companies to be able to offer low prices on international calls, of which non-payment of the ADC is just one, sly alternative. No doubt the consumer making international calls will stand to save.

But the government operator will lose some part of the revenue from the ADC because of the masquerading phenomenon.

Now it can be shown and extended from standard public finance theory that if the ADC has the effect of creating a deadweight loss, its non-payment will add to this cascading effect. This is so especially if the revenue loss to the government from the non-payment of the ADC were to be higher than the savings the consumer realises from a low priced international calls (assuming the low price is attributable to non-payment of the ADC).

Based on standard public finance theory, it can be shown that an amount equivalent to the ADC, if imposed as a lump-sum charge (rather than as per minute ADC on specific services such as international calls) on telecom companies, would increase revenues.

An example is the revenue share of 5 per cent of the adjusted gross revenues levied on all telecom service providers (except Internet Service Providers or ISPs) towards the Universal Service Obligation Fund. Such a lump-sum charge will cause no consumer substitution that would result from a commodity or service-specific charge.

The intuition behind this result is that with a lump-sum charge on a larger revenue base of the companies, higher revenues can be generated, than with a service-specific charge, while allowing consumers to use their preferred service (not substitute cheaper alternatives).

This may not make sense in one time-period, but it would make a lot of difference to the revenues year to year, when the profit base of companies are reduced due to the specific charge.

The move to shift the ADC to a revenue-sharing basis is welcome in the light of the above. Further, service prices, especially of national and international long distance calls,will drop, to the benefit of the consumer.

However, the Department of Telecommunications' directive continues to be service specific, because of its recommendation of a levy as a higher percentage of revenue for ILD services, when compared to NLD services. As per the framework highlighted above, the ADC should be merged with the USO charges, and levied at the same rate across all services, to remove the distortions caused by the excess burden.

It should be remembered that this article does not bring out the merits or wisdom of a charge (specific or lump-sum) to accomplish certain objectives. Given that this charge is currently levied, the article speaks of the merit of one vis-à-vis the other, based on the standard framework.

(Kala Seetharam Sridhar is with the National Institute of Public Finance and Policy and V. Sridhar is Professor, Information and Management, at the Management Development Institute, Gurgaon. Their views are personal.)

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