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What does the 6 per cent GST hike in smartphones mean to consumers?

The GST council has increased GST rate on mobile phones and its specified parts from 12 per cent to 18 per cent. So, how will it affect the consumers?

The GST Council in its 39th meeting has decided to increase the GST rates of several products including mobile phones. The council has increased GST rate on mobile phones and its specified parts from 12 per cent to 18 per cent. The move is meant to correct the inverted duty structure.

“Mobile phones and specified parts to attract 18% versus 12%. All other items, if there’s a need to calibrate the rates, to remove the inversion, we can take them up in future, examination of that can happen at a later time,” said finance minister Nirmala Sitharaman after the conclusion of the 39th GST Council.

What is an inverted structure?

As of now, the GST rate on mobile phones was 12 per cent while the rates for its components like batteries and more were 18 per cent. This caused an inverted tax structure. This refer to a situation where the rate of tax on inputs purchased is more than the rate of tax on outward supplies. Simply put, mobile phones were attracting less GST rate as compared to its components. So, in order to correct this measure, the GST Council has implemented this new rate.

How will it affect the smartphone industry?

This increase in GST rates will put pressure on the whole chain starting from manufacturers to the end consumers. Reacting to the move, Manu Kumar Jain, Managing Director, Xiaomi India said that the recommendation by the GST Council to raise GST Rates on mobile phones from 12 per cent to 18 per cent will seriously harm the industry. He said that the industry is already “struggling with depreciating INR & supply chain disruption due to Covid-19. At least all devices under $200 (=₹15,000) must be exempted from this. Everyone will be forced to increase prices. This will further weaken the mobile industry’s #MakeInIndia program,” he said.

Dinesh Sharma, Mobile Business Head, ASUS India said: “Smartphones are a key necessity and a very low margin, high volume, highly competitive business. The incidence of tax will directly have to be passed on to consumers. Higher taxes, coupled with rupee depreciation and higher input costs due to the impact of COVID-19, will lead to a significant escalation in prices and will affect demand negatively. Higher taxes on mobile phones and smartphones in the past have also resulted in higher incidences of duty evasion by unethical market participants, and have led to legitimate revenue loss for the government. It also increases the chances of export of stocks meant for local markets due to higher import duty credit available to traders. This again results in revenue loss for the government due to GST redemption provided to the exporters.

12% GST was very close to the earlier average VAT on smartphones and mobile phones. Hence, it was a price neutral transition to GST. With 18% GST, the tax on mobiles / smartphones is now a higher historical tax that will have the above highlighted negative implications.”

How will it affect consumers?

The increase of GST rates will directly affect the consumers as the brands are not in a position to absorb this impact. “This is very detrimental and harmful to the long term vision of digital India. No brand is in any position to absorb this impact of 6%. So this will be passed on to the consumer in terms of a price hike. Given current conditions due to coronavirus, this will further dampen the demand and result in lower than required growth in the 2nd largest smartphone market in the world,” Navkendar Singh, Research Director, Client Devices & IPDS, at IDC India.

This simply means that customers will have to shed more money to buy a new smartphone starting in April. This is primarily due to the fact that brands are already facing manufacturing problems back in China, which has led to a surge in the prices of several components. This coupled with an increase in customs duty on imported components has put severe pressure on the profit margins of the smartphone brands. In this already competitive market, where the margins are quite less, the increase in GST rates will leave no option for the brands, but to pass the extra cost to consumers.

Is there a way around?

The smartphone companies will have to take the pressure and have to re-calibrate the cost structure and end-pricing in order to minimise the increase in the rate of smartphones. “A 6% increase in GST will lead to an increase in the retail price of the smartphones launched before the 1st of April. Brands can smartly adjust the Bill of Material (BoM) of the new smartphones so to accommodate the price increase,” said, Parv, a Research Analyst, Counterpoint Research

He further added that even if the brands increase the prices, it won’t be exactly visible to the consumer. “However, brands will have to re-calibrate the cost structure and end-pricing, considering consumer’s willingness to pay. In the short term, consumers may opt for the slightly cheaper model instead of a more expensive model. So, it will be more of a waterfall effect, but consumers won’t stop buying phones,” he added.

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