Is GST hike on smartphones a mistake?

In March 2020, the Centre announced a hike in the rate of smartphones from 12% to 18%. The hike was not received very well and was heavily criticised by experts. This article outlines the possible impact of fluctuating tax rates on the smartphone industry.

Why hike the tax rate on smartphones?
Before we move on to understanding the impact of the hike on the smartphone industry, it is important to know why this hike was implemented. According to the GST council, the hike in the tax rate of smartphones is an attempt to correct the inverted duty structure in the smartphone industry, where the components were taxed at 18% and the finished products at 12%. At the 40th GST council meet, Union Corporate Affairs and Finance Minister, Nirmala Sitharaman announced that the GST Council is looking to correct the inverted duty structure under which tax levied on inputs is higher than the tax on finished products leading to higher amount of refunds which ultimately impact collections. GST collections have dramatically fallen over the last few months and just like the hike on tax for smartphones, the Centre might make corrections in the near future.

Weaker demand
The demand for the latest smartphones is likely to reduce because of the hike in the tax rate. Most smartphones launched after April 1 are likely to include the increase in tax rate - something that consumers are unlikely to be okay with. This means companies will need to revisit the drawing board to recalibrate costs.

Higher pricing
Smartphones are likely to become a lot more expensive in India due to the hike in the tax rate. Indians who are known to be price sensitive are likely to wait for the prices to drop or purchase their preferred smartphone from the grey market. Indians are also renowned for asking family or friends to purchase smartphones from large electronic goods fairs and sales viz. the Dubai shopping festival. ICEA which represents companies like Apple, Oppo and Vivo said this hike reverses years of painstaking efforts by governments and the industry to increase mobile manufacturing and penetration by sensible policy interventions and tax rationalization, and gives the grey market an opportunity to once again dominate the smartphone sector.

Ease of business no more
Manu Kumar Jain, Global VP, Xiaomi, and Managing Director, Xiaomi India, tweeted “This can weaken demand and affect the mobile industry's ‘Make in India’ programme. It could also have a long lasting impact on internet penetration and the Digital India programme, as a majority of Indians access the internet on smartphones.”

Most recently, Samsung shut its biggest manufacturing unit in China and relocated to Noida, India. The Korean brand did so as it felt China’s position as a global supply chain hub was headed toward a paradigm shift. Whether the hike in GST on smartphones will adversely affect manufacturing is not yet clear. But experts are of the opinion that fluctuating tax rates don’t bode well with foreign companies looking to set up manufacturing units in India. Additionally, fluctuating tax rates don’t really push India up the ease of business scale. 

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