In February this year, honorable Supreme Court of India cancelled all 122 telecom licences after hearing the petition of irregularities in 2G auction held in 2008. Indian Telecom companies have always been against the move of newly proposed auction price for 2G spectrum allocation. But now, the cabinet has approved a plan to levy a $5.7 billion surcharge on airwaves owned by long-established telecom operators. Under the proposal, all companies holding bandwidth beyond 4.4 MHz will have to pay the fee.

The government proposals are likely to hurt the country’s top telecom service providers specifically to Bharti Airtel and Vodafone. The proposal has been approved by Indian telecom regulators to levy one-time fee on telecom companies holding excess airwaves (beyond 4.4 MHz). However, the decision will help the government which is desperately endeavoring to raise funds in order to cut the fiscal deficit.

Of course, the newly proposed surcharge will hurt Indian telecom vendors at a time when their profits are steadily declining quarter-over-quarter. At present, telecom vendors are quite concerned with average revenue per user (ARPU) due to increasing competition in the Indian telecom industry. Besides, some of the telcos are under pressure after third generation bandwidth auction in 2010.

In 1994, the “Telecom Regulatory Authority Of India” (TRAI) opened a door for private vendors and these operators were initially given 4.4 MHz bandwidth to start their services in the country. In 2001, the government allotted extra spectrum to these telecom vendors in order to help them to ease traffic congestion on their networks.

But this time, the government’s newly approved proposal is stifling to vendors. However, the fee will be levied from Jan 1 next year for the remaining tenures of the companies. The Telecom Minister of the country–Kapil Sibal–has clearly stated that those who don’t want to pay can return their excess spectrum. What does it mean ? It means that telcos will have to pay the fee by ‘hooks or crooks’. The actual fee that telcos would have to pay will depend on the price of bandwidth auction which is scheduled on Monday.  The telecom department has already set the base price for the auction at 140 billion rupees for every 5.0 MHz GSM slot.

Indian telecom vendors would have to pay a margin amount (a difference of ‘2G spectrum price to be determined at an upcoming auction’ and ‘low-state set price’ for airwaves auction in 2008) to government. In addition to these, Indian telecom regulators are charging $300 million for all India permits from vendors. However, the government believes that the surcharge strategy will create a level playing field between old and new operators.

Furthermore, GSM-based carriers holding beyond 6.2 MHz of airwaves would have to pay a retrospective fee for the extra airwaves for the period between July 2008 and December 2012. Moreover, the telecom minister also said that they would come back to the cabinet with a proposal fees for CDMA allocations.

Of the INR 309 billion ($5.7 billion), private sector operators will have to pay an estimated 191 billion rupees, while PSU (BSNL and MTNL) will pay 118 billion rupees. More importantly, it’s clear that if all goes on the right way then “Bharti Airtel” would have to pay about $1 billion in surcharge, whereas Vodafone is expected to pay about $550 million for the same.