Mobile Phones rate hike and 39th GST Council Meeting.

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Brief about the meeting. 

The council, in its meeting which is chaired by the union Finance Minister on March 14 has hiked the GST rates on mobile phones and allied parts from 12% to 18% with effect from 1st April 2020. It also slashed GST rate on Maintenance, Repair and Overhaul service (MRO) of aircraft from 18% to 5% with full ITC (Input Tax Credit). The council also rationalized the rates on machine made and handmade matchsticks to 12%. Machine made matchsticks used to attract 18% while hand made matchsticks attracted 5%. The council, however, deferred rationalizing the tax structure of fiber, footwear, man made yarn and fertilizers to the next meeting.



The highlight of this meeting was the hike in rates of mobile phones. Finance Minister Nirmala Sitharaman quoted that "Mobile phones and specified parts to attract 18% versus 12%. All other items, if there is a need to calibrate the rates to remove inversion, we can take them up in future, examination of that can happen at a later time."

Typically, mobile phone purchase attract CGST (Central GST) + SGST/UTGST (State/Union Territory GST) or IGST (Integrated GST) depending upon certain factors. If one buys a phone from a seller located in his state/UT, he will pay CGST 9% + SGST/UTGST 9%. If one buys a phone from a seller located outside of his state/UT, he have to pay IGST of 18% on his purchase.

Government rationale behind increasing the tax rate on mobile phones

Nirmala Sitharaman stated that this decision was taken to correct the inverted duty structure on some products wherein the rate of tax period on inputs purchased is more than the rate of tax of output on outward supplies, and not to increase the prices. She also added "There was a presentation by the Fitment committee to look at the problem of inverted tax structure."
But this decision will surely push up the prices and hurt the smartphone industry. According to some industrialists, this move will add to the problems of companies already battling amidst competition and supply shortage from China due to the COVID-19 outbreak.

To read more about COVID-19 and Impact on factories. click here.

Industry Experts versus The Government 

Managing Director of Xiaomi, India's leading mobile phone company, Manu Jain said 'the industry will crumble fro  this decision of council. He added that the industry is "struggling with profitability" as the rupee has weakened against the dollar, therefore impacting the import costs. He tweeted "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 Rs. 15,000 should be brought out to 12%. (similar to differential GST structure for TVs smaller than 32")



Chairman of ICEA (Indian Cellular and Electronics Association), Pankaj Mohindroo said "Our domestic target consumption of Rs. 6 trillion ($80 billion) by 2025 will not be achieved due to this hike.

NK Goyal, president of Telecom Equipment Manufacturers Association of India quotes that "the ideal way would have been for the GS on components to be decreased to 12%. Prior to the council meeting, ICEA said to Finance Minister Nirmala Sitharaman that any increase in the tax rate will adversely affect the government make in India programme, digital payment system and internet penetration.

Meanwhile, Director of brand strategy at VIVO India, Nipun Marya quotes "we are still evaluating the impact of the new tax structure and will be taking decision in the next few weeks. Confederation of All India Traders also opposed the move. CAIT national secretary general said "The decision is highly deplorable, unwarranted and will destabilize mobile phone industry in India, which is already facing a battle for survival from online platforms. Instead of relief, the mobile sector is burdened with an unnecessary hike."

According to Navkendar Singh, Research Director at IDC, "this new burden has potential to disturb growth prospects of the Indian mobile phone market in the coming year". He added that "This hike defies any logic amid an ongoing crisis. The move has capability to dislodge plans for making India a digital economy as mobile phones are set to get costlier, while we are anticipating a lower growth rate for the year at 5.6%, this move may decrease the rate."

The Crux

Amidst all this, the fact that is making the analysts, industrialists and manufactures more uncomfortable is that after facing severe supply crunch due to COVID-19, they are now staring at falling demand. Steep decline in footfall is witnessed as public gathering in malls and markets is discouraged. This whole scenario has lowered the sale of most of the consumer good items including smartphones. Any price hike at the moment is set to further worsen the business prospects of the industry.

Author
Jay Kumar Hotani





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