Bengal to lose Rs 425 crore for higher VAT rate on handsets

West Bengal is set to lose Rs 425 crore on account of the difference in value added tax (VAT) rates between the state which pegs VAT at 12.5 per cent and the normal income tax (I-T) rate of 5 per cent, said a report by the Indian Cellular Association (ICA).

The apex body of the Indian mobile industry stated that multiple VAT rates on mobile handsets across 35 States and Union Territories has resulted in the resurgence of the grey market.

“India is a price-sensitive market. An increase in VAT in some states to the RNR rate of 12.5 per cent aides the emergence of an internal parallel market. We estimate mobile handsets worth Rs 5,900 crore will move outside the VAT chain in 2010-11,” said Pankaj Mohindroo, president, ICA.

 

This manifests in an increasing domination of market supply variables by a situation similar to that of Chinese mobile handsets. The report supports claims of a flourishing grey market with the support of a phenomenon called the “Internal Parallel Market”.

Consider a situation where due to differential VAT, the handset retailer is persuaded to sell in different states with lower VAT. This would create a situation which is similar to the external parallel market of Chinese phones.

“Additionally, while VAT loss to the state government has continued to surge, this has paved the way for a robust Chinese unbranded market. Apart from variable VAT, the entry tax and a distorted Octroi has weakened organised mobile handset industry in India,” the report said.

Earlier, West Bengal handset manufacturers had said that if VAT was not brought down to earlier levels (4 per cent), then handset sales, especially those of high-end models, would witness a decline of at least 70 per cent, since VAT in some neighbouring states is much lower.