Industry and analysts denounce GST rate hike to 18% on mobile phones

Xiaomi MD says move could weaken demand as smartphone makers will be forced to raise prices

At a time when all major handset manufacturers are struggling to cope with disruptions caused by the coronavirus (COVID-19), the Goods and Services Tax (GST) Council has dealt a body blow to the mobile phone sector, industry players said.
 
Notwithstanding falling demand and severe crunch in supply of key mobile components, the council on Saturday announced that the rate of taxation had been raised on “mobile phones and specific parts presently attracting 12 per cent to 18 per cent”.
 
Reacting to the move, Manu Kumar Jain, managing director of Xiaomi India, said the industry had heeded Prime Minister Narendra Modi’s call to participate in the “Make in India” initiative. “But today’s recommendation by the GST Council to raise GST rate on mobile phones from 12 per cent to 18 per cent will seriously harm the industry,” he said.
 
He said the industry was already struggling with profitability because of the depreciating rupee. “Indian smartphone industry is facing supply chain disruption because of the current COVID-19 situation,” he said.
 
“As a result of this GST increase, all smartphone makers will be forced to increase prices. This can weaken demand and mobile industry’s Make in India program. This could also have long lasting impact on internet penetration and digital India program as majority of Indians access internet on smartphones,” Jain said. He requested the prime minister and finance minister to reconsider the increase.
 
“At least for people who cannot afford to buy expensive phones, we suggest that GST on all phones under Rs 15,000 should be brought back to 12 per cent (similar to differential GST structure for TVs smaller than 32"),” he said.
 
Meanwhile, Nipun Marya, director of brand strategy at Vivo India, said: “We are still evaluating the impact of the new tax structure and will be taking a decision in the next few weeks.”
 
Analysts said the rate hike could compound manufacturers’ problems as factory shutdowns and production cuts in China have led to a surge in the prices of several components. The increase in Customs duty on imported components announced in the Union Budget has also put severe pressure on their margins.
 
According to Navkendar Singh, research director at IDC, the new burden in the form of higher GST has the potential to mute growth prospects of the India’s smartphone market in 2020. “Amid an ongoing crisis, this hike defies any logic. The move has potential to dislodge plans for making India a digital economy as smartphones are set to get costlier. While we were anticipating a lower growth rate for the year already — at 5-6 per cent — the move may decrease the rate further,” he said.
 
Faisal Kawoosa, chief analyst at TechArc, said though the government could earn an additional Rs 12,000 crore in revenues in the form of GST collections, the move will be detrimental to the health of the telecommunication market that has so far performed better than other consumer facing sectors in India. However, the additional revenue estimates could be matched only if the market remains at 160 million units this year, as purchases are already in decline.
 
Confederation of All India Traders (CAIT) strongly opposed the move. Praveen Khandelwal, CAIT national secretary general, said, “The decision is highly unwarranted, deplorable and will destabilise mobile trade in India, which is already facing a battle for survival from online platforms. Instead of providing relief, the mobile sector is burdened with an unnecessary hike.”
 
According to companies, as most leading players are already operating under wafer thin margins, they have no option but to pass on the additional burden. In 2018-19, all of the top four players — Xiaomi, Samsung, Vivo, and Oppo — reported poor performances. While, Xiaomi India’s bottom line went into the red for the first time, Samsung’s net profit plunged 59 per cent. Oppo’s net losses widened by 93 per cent, and Vivo continued in red.
 
However, what is making analysts and manufacturers more uncomfortable is that after facing severe supply crunch they are now staring at falling demand. As public gatherings are being discouraged, malls and markets are witnessing steep decline in footfall. This has led to lower sale of most consumer good items including mobile handsets. Any price hike at the moment is set to further worsen the business prospects, the said.