January 15, 2007

Illegality of VoIP - Exaggerated

Last month there was a news report that the Indian Government was “planning a clampdown on BPOs and KPOs over, what it feels is, illegal use of internet telephony.” Indeed, Om Malik and Tom Evslin noted in their respective blogs on this news item and the story was even slashdotted. At that time I tried to pint out that this might be a case of bad reporting; but I couldn’t produce supporting material. Even today I can not produce a satisfactory reference for my position; but I can point out a circumstantial one. Today I happened to come across another news item in India regarding a paper filed by VON Coalition with the Office of United States Trade Representative. As you know, VON Coalition is a trade association of companies that have financial interest in VoIP and one of the leading proponents of changing the regulatory environment that supports VoIP technology. In effect I am using a potentially a “hostile witness” to support my claim. Please keep in mind that VON Coalition submitted their letter about ten days after the Indian story broke out, still they failed to reference it.

VON Coalition submission states that India legalized VoIP in 2002 (they add only, but that is besides the point). It also points out that (as I have stated many times before) “VoIP can be used for making phone calls from a PC to a phone abroad, PC-to-PC within and outside India, and between two PCs globally.” There are restrictions only when interconnecting to PSTN in India. Effectively, the restriction states that one can interconnect to PSTN only at the International Gateways and there are regulations and fees for such interconnections. This is very much like the case of Iowa. As I have said before, if we truly believe that VoIP is going to take over, why bother about it. Last month news story made a big point about the planned clampdown will impact BPOs and KPOs. Here again VON Coalition gives the clarification. There are no restriction for BPOs and KPOs to use VoIP to conduct their business with overseas customers. The problem comes only if they connect to the PSTN, just so they can reach their employees (presumably at branch locations or home offices): “Similar restrictions also apply to private enterprises that wish to use VoIP to provide internal communications to their employees. For example, a ban still prohibits enterprises from using VoIP to directly call the Indian PSTN. Enterprises must partner with Indian telcos in order to permissively terminate VoIP calls to the Indian PSTN.” This restriction will not curtail their operations at all; but on the other hand if such a restriction is not in place then there will be many enterprises declaring themselves to be BPO or KPO and their employees are the general public and will be terminating calls to PSTN thereby undermine the original regulation.

Now you may take issue with regulations as such but the point to observe is that only PSTN is protected and regulated – a grandfathered situation. In India, the IP world is free of regulations. And today I say with much more confidence that the original story is badly reported and poorly edited. Do you want to take a wager whether this post will get slashdotted?

Posted by aswath at January 15, 2007 04:59 PM
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I have been following both Indian news stories (The Economic Times and The Hindu). There are two separate issues about the legality of VoIP in India and sometimes, the distinction between the two is lost.

The first one is the one you have repeatedly discussed: “VoIP can be used for making phone calls from a PC to a phone abroad, PC-to-PC within and outside India, and between two PCs globally. There are restrictions only when interconnecting to PSTN in India." And I agree with that 100%.

The second issue - one that is a bit obscure and often misunderstood - is about who can sell VoIP in India. When India legalized VoIP in 2002, it also restricted the selling of VoIP to only licenced ISPs with Class A licence. That means that all of the services used by Indians but supplied by companies based in "foreign" countries may be "illegal".

My further research showed that ISPAI (ISP Association of India) is the "culprit" behind enforcing this regulation. Clearly, its members have vested interest since they pay huge up front licence fees on top of 12% tax and 6% revenue sharing fees.

So using Skype or Vonage is not illegal (as long as you don't touch the PSTN) but *how it is sold* may be illegal. Hence the proposed regualtion pushed by ISPAI as reported in news story:

"It (DOT] is giving final touches to a proposal under which ITeS companies[the users] must furnish the names of authorised service providers from whom bandwidth and internet telephony minutes have been taken. The companies will also have to give an undertaking that they will not use the services of unlicensed foreign service providers such as Net2Phone, Vonage, Dialpad, Impetus, Novanet, Euros, Skype and Yahoo."

ISPAI claims that when their member companies sell Vonage-like VoIP services, they are at a disadvantge. Which is presumably why one such licensed company, Phonewala's rates are much higher than Vonage (http://www.phonewala.com/html/products_smb.html).

Their story appeared in The Economics Times on Jan 4, 2007 (http://economictimes.indiatimes.com/News/NewET/Emerging_Business__IT/Net4_to_offer_cards_for_ISD_calls_at_Re_1/articleshow/msid-1042992,curpg-1.cms)

There was also a news story by TIMES NEWS NETWORK on FRIDAY, DECEMBER 01, 2006 that said that even BSNL plans to offer VoIP in India which should clraify to all that VoIP is not illegal in India.

Posted by: Kanti Purohit at January 15, 2007 08:20 PM


Thanks for the detailed comment and explicitly agreeing with my take on the regulatory status of VoIP in India. It is only on the surface it looks like the second issue is congruent to the first one. But in my opinion, the second issue is related to revenue taxation. Companies that do business in many European countries have to collect VAT from their customers, whereas if they do business in US they do not have to. So if Vonage does business in India, then they have to pay the relevant taxes; but if I am a subscriber of Vonage in US and use the service from India, then Vonage does not have to pay any Indian taxes. So it all boils down to where the financial transaction takes place. Another way to look at it, how will ISPAI handle services like Free World Dialup, that does not connect to PSTN on its own and does not charge anything. 12% or 6% of zero is zero. For some reason I am reminded of the Thennalirama story of him giving the horse away to someone who will pay 1000 rupees for his cat. I don't think ISPAI's position is not tenable. But I think we agree that whatever is the position of the government, it is not illegal to use VoIP and that BPOs and KPOs are not disadvantaged.

Posted by: Aswath at January 15, 2007 10:17 PM

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