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Update, March 17 2020 (7:24AM ET): We’ve updated the article with comment from Asus India mobile business head Dinesh Sharma. The executive says the new tax rate combined with COVID-19 will lead to a sharp price increase. You can read the comments in the original article below.

Original article, March 16 2020 (9:15AM ET): The Indian government, under the Modi administration, has made a concerted effort to promote manufacturing in the country under the Make in India campaign. However, a recent move by the Goods and Services Tax Council of India might deal a blow to the entire smartphone industry.

The council has decided to increase the tax rate by 6% over the current 12% tax rate. The updated tax rate of 18% will be applicable on both components, as well as smartphones.

Why are taxes being raised on smartphones in India?

The GST council of India is raising the taxation rate on smartphones to meet the ongoing rate on raw materials and components. So far, India has slapped an 18% GST rate on raw materials used for manufacturing smartphones. The tax rate on the final product was, however, 12%. This leads to an inverted pyramid of taxation.

In a bid to rationalize taxes, the council has increased taxes on mobile phones to match the 18% GST on components. Inevitably, this will lead to an increase in prices across the board.

Manu Kumar Jain, Xiaomi India MD, took to Twitter to denounce the move.

These are tough times for smartphone manufacturers using India as a manufacturing hub. The depreciating value of the Indian currency versus the US dollar, constrained supply chains due to COVID-19 as well as incredibly stiff competition, means that profit margins are minimal as it is. With an increase in taxation, brands will be left with no recourse but to raise prices.

Elsewhere, Dinesh Sharma, Mobile Business Head at Asus India had this to say.

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.

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.

The increase in taxes will, obviously, deal a lot of damage to one of the fastest-growing industries in India and we’re hearing in no uncertain terms that increasing prices will be passed on to customers instead of being absorbed by brands. In a memo to the GST council, the Indian Cellular and Electronics Association has raised the issue, but it remains to be seen whether any exemptions will be made to keep prices low, especially in the popular sub-Rs. 15,000 segment.

The move won’t just affect consumers and manufacturers, as Sharma says ‘duty evasion’ by some companies could cost the government revenue as well.

The revised tariffs go in effect starting April 1, and you can expect smartphone prices to go up soon after.

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