From April 1st, GST increase on mobile phones will make them costlier

It is time for Indian consumers to be prepared for a price hike on mobile phones from the 1st of April 2020. Owing to two reasons, the price hike seems inevitable. One is the global outbreak and spread of COVID-19 and the other is the recent Goods and Service Tax (GST) hike on mobile phones.

COVID-19 as a cause

India, so far, has been largely dependent on China for imports of electronics and other parts for manufacturing mobile phones. The outbreak of COVID 19 has deeply impacted the Indian electronics markets and the impact is seen in terms of importing mobile phones and its components. Reports say that the closure of factories and lockdown of industrial zones in China has disrupted supplies to India, where Chinese phones command the biggest share of the market. Industry stakeholders are in the opinion that the reduced stocks of phones will have an impact on the prices of affordable smartphones and feature phones the most. Hike on premium smartphones won’t be hurt as much as their demand is already low in India. Even as the Chinese factories resume operations in a phased manner, the imported stocks are not going to witness a surge in supply. And with India also showing increased signs of positive Corona cases and the government imposing lockdown in major commercial districts, manufacturing in India might be hit to a large extent. When there is a mismatch in the demand vs supply cycle, it is certain that there will be a price change to the product. The mobile manufacturers in India have expressed that the impact caused by COVID-19 on mobile sales will last more than 180 days.

GST as a cause

This is the second and the main reason for the expected price hike on mobile phones. Union Finance Minister Nirmala Sitharaman, recently, announced that the GST on mobile phones and specified parts has been increased to 18% from the existing 12%. The announcement was made at the 39th GST Council meeting that was chaired by Finance Minister Nirmala Sitharaman. Ministers of States & UTs and senior officers from both center and states were part of this meeting. This increase comes into effect on April 1, 2020.

According to the Finance Minister, this decision was taken not to increase the prices but to correct the inverted structure of duty on some products wherein the rate of tax paid on inputs purchased is more than the rate of tax on finished products on outward supplies.

This decision, however, has not gone down well with mobile manufacturers. Xiaomi’s Global Vice President Manu Jain in his opinion has said, “Xiaomi and the entire smartphone industry has been committed to honorable Prime Minister's flagship ‘Make In India’ initiative. But the recommendation by the GST Council to raise the GST rate on Mobile Phones from 12% to 18% will seriously harm the entire industry. India's smartphone industry is already struggling with profitability due to depreciating INR vs US$. The Indian smartphone industry is facing supply chain disruption due to the current COVID-19 situation. As a result of this GST increase, all smartphone makers will be forced to increase prices. This can weaken the demand and mobile industry's Make in India program. This could also have a long-lasting impact on internet penetration and the digital India program as a majority of Indians access the internet on smartphones. We request the Honorable Prime Minister and Finance Minister to reconsider this. At least for people who cannot afford to buy expensive phones. We suggest that GST on all phones under ₹15,000 should be brought back to 12% (similar to differential GST structure for TVs smaller than 32").”

Reacting to the GST increase, Sunil Raina, President & Business Head, Lava International, said, “This is an erroneous move to hike GST on mobile phones, especially at a time when the world is fighting a Pandemic. This move will adversely affect the buyers, industry, economy as well as the momentum of ‘Make in India’ program. We are working with the Government and are hopeful that the right decision will be made for the industry.”

India’s leading mobile industry association, ICEA says India’s domestic consumption target of $80 billion by 2025 will not be achieved due to the GST hike. The 12% GST on mobile phones in place of VAT was already a massive hike in taxes at a time when GST was aimed at reducing the tax on consumers. With 18% GST, the extremely price-sensitive Indian consumer will either delay their purchase or buy in the grey market. The 18% GST hike will also bring back the bad old days of the early 2000s when the grey market in mobile phones was rampant at 90%. It reverses years of painstaking efforts by governments and industry to increase mobile manufacturing and penetration by sensible policy interventions and tax rationalization.

ICEA has opined that the rationale for correcting the inverted duty structure by increasing GST is misplaced. The need of the hour is to reduce GST on components, rather than hiking the tax on mobile phones.

Collective efforts from all the mobile manufacturers are on to persuade the GST council to review their decision in light of new facts that may have escaped their attention. But right now, the big matter of concern for the governing body is the prevention of the mass spreading of COVID-19. Amidst the larger problem, would the government yield to this GST revision persuasion before April 1st?