Smartphones to become more expensive in India following tax increase
India’s Goods and Services Tax Council decided on Saturday to raise the tax rate on smartphones and specified components to 18%, a sharp 6% increase from the previous 12%. This hike will inevitably cause an increase in smartphone prices across all segments, and many fear it will have negative consequences on the growth of the Indian smartphone market.
“It was decided by the Council that the GST rate on mobile phones and specified parts which presently attract 12% will now be at 18%.”
The move comes at the time when smartphone OEMs are already struggling with razor-thin profit margins, depreciating currency rate, and battling cut-throat competition to retain their identity. The resultant price hike from the increased GST rate, therefore, will likely be passed down to the consumers as smartphone makers are currently in no position to absorb the additional tariff imposed by the government — not without sustaining some serious losses or decline in business.
Xiaomi India’s MD, Mr. Manu Kumar Jain was swift to react to the tax hike. Manu tweeted that the move will be detrimental to the growth of the Indian smartphone industry and would work against the Govt’s Make In India initiative.
In a separate tweet, he urged the govt to reconsider the move, citing that the industry is already fighting two battles with depreciating value of Indian Rupee against US dollar and supply chain disruption due to COVID-19. He even suggested that the devices that cost below RS. 15,000 ($200) should be exempted from the new tariff.
The industry is already struggling with depreciating INR & supply chain disruption due to Covid-19.
At least all devices under $200 (=₹15,000) must be exempted from this. https://t.co/hOMpSpTyKk
— Manu Kumar Jain (@manukumarjain) March 14, 2020
Dinesh Sharma, Mobile Business Head at ASUS India, agreed with the general sentiment.
“Smartphones are a key necessity and a very low margin, high volume, highly competitive business. The incidence of tax will directly have to be passed on to consumers. Higher taxes, coupled with rupee depreciation and higher input costs due to the impact of COVID-19, will lead to a significant escalation in prices and will affect demand negatively. Higher taxes on mobile phones and smartphones in the past have also resulted in higher incidences of duty evasion by unethical market participants, and have led to legitimate revenue loss for the government. It also increases the chances of export of stocks meant for local markets due to higher import duty credit available to traders. This again results in revenue loss for the government due to GST redemption provided to the exporters.
12% GST was very close to the earlier average VAT on smartphones and mobile phones. Hence, it was a price neutral transition to GST. With 18% GST, the tax on mobiles/smartphones is now a higher historical tax that will have the above highlighted negative implications.”
The surge in the GST rate is said to be a corrective measure to fix the inverted duty structure (IDS), a situation where the tax rate on input raw material is higher than the rate on the finished product (output). At last year’s GST Council, the issue of inverted duty was raised to the tax body on close to a dozen items including smartphones, footwear, fabrics and more.
The experts, however, do not agree with the GST Council’s rationale behind the tax hike. In a letter to Finance Minister, India Cellular and Electronics Association (ICEA) chairman Pankaj Mohindroo said:
“We understand that one of the logic being put forward is that the industry is suffering from inverted GST! Instead of correcting this wrong by rationalizing GST on parts, components and inputs of mobile phones, a bizarre move to increase GST on the final product is now being considered. Mobile Phones is the only sector that has performed under flagship ‘Make In India’ program of the government. Hence, any change in the GST will be detrimental to the consumer sentiment which in turn can impact domestic manufacturing activity.“
The revised GST tariff on smartphones is set to come into effect from 1st April. It remains to be seen whether the government will consider making any adjustments or exemptions or go along with the recommendation of the GST Council. It will also be interesting to see how various smartphone OEMs respond to the increased tariff and what will be their new pricing strategy for their existing as well as upcoming smartphones.