Amidst the gloom surrounding Coronavirus and economy in general, the Indian government has increased the GST (Goods and Services Tax) on mobile phones from 12 percent to 18 percent during a meeting in New Delhi today. This would mean that the phone prices in the fastest-growing smartphone market in the world could be hiked in the coming days.
The GST council is said to have deferred the proposal of hiking the rates on fertilizers and footwear due to the current economic slowdown and impact of the novel coronavirus pandemic. As per a report on CNBC-TV18, the council felt apt to increase the taxes on mobile phones considering it’s one of the sectors which seemingly had less impact from the ongoing economic slowdown.
ICEA, the industry body, had earlier stated that the increase in GST would be detrimental for consumer sentiment and in turn impact the local manufacturing of smartphones. Clearly, that has no bearing in the council’s decision to hike taxes on mobile phones.
“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,” ICEA Chairman, Pankaj Mohindroo, had said in a letter to the Finance Minister earlier today.
Bad news for Digital India story
As per the research firm, IDC, the Indian smartphone market grew by a modest 8 percent Y-o-Y in 2019 shipping 152.5 million units. In fact, India was amongst a handful of top markets which grew in 2019. The hike in GST would act as a deterrent for this growth.
“This doesn’t bode well for the growth intended by the government for digital services,” says Navkendar Singh, Research Director, Client Devices & IPDS, at IDC India. “It has to start with more people coming in the smartphone fold. With these decisions that won’t happen.”
Despite being the fastest-growing smartphone market in the world, India still has a long way to go with an estimated penetration of around 400 million people out of 1.34 billion having access to smartphones in the country.
“Considering the current supply and projected demand scenario in the next couple of quarters, brands are not in any position to absorb this hike. They will be forced to pass it onto the consumer, which will further increase the replacement cycle (which has been a major engine of growth in the market for the past couple of years),” says Singh.
AIMRA (All India Mobile Retailers Association) which represents lakhs of mobile retailers in the country had also requested the Finance Minister not to hike the GST on mobile phones. “An increase of 6% GST will break the crippling mobile retail industry, already burdened with low margin business in today’s scenario and fighting for rightful existence,” said Arvinder Khurana, National President, AIMRA. “The increase of 6% would directly lead to the hike in prices of product, impacting the consumer behavior leading to a slowdown in the demand affecting the business adversely.”
Now that the government has gone ahead and increased the GST, it remains to be seen how the smartphone OEMs react and if they will increase the prices across the board in the coming days. And more importantly, what sort of effect will it have on the ‘Make in India’ story.
Update: Xiaomi India reacts to the hike in GST for smartphones
Xiaomi and the entire smartphone industry has been committed to honorable Prime Minister’s flagship “Make In India” initiative. But today’s 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 majority of Indians access internet on smartphones.
We request the Honorable Prime Minister and Finance Minister to reconsider this. At least for people who can not 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″).
We once again request the government to reconsider this to avoid crumbling of the industry.