Mobile VAT hike in 5 states leads to Rs 388-crore loss

Written by Rachana Khanzode | Mumbai | Updated: Aug 23 2010, 05:40am hrs
A year after the state governments of Maharashtra, Delhi, Madhya Pradesh, Chattisgarh and West Bengal increased value-added tax (VAT) on mobile phones from 4% to 12.5%, the decision seems to have led to revenue loss for the country, as a parallel market takes hold.

A VAT loss of Rs 388 crore was recorded last fiscal, compared with almost nil the previous year.

Estimates by the Indian Cellular Association (ICA) suggest the revenue foregone could grow 110% to Rs 812 crore in 2010 alone, as internal and external parallel markets grow.

Pointing out the loss, some of it also due to the lack of co-ordination between Customs and all state governments regarding importers of unbranded mobile phones, the association has written to finance minister Pranab Mukherjee and chairman, empowered committee of state finance ministers Asim Kumar Dasgupta, to look into the matter.

Pankaj Mahindroo, president, ICA, said: The external parallel market (grey market) has picked up drastically in spite of all the imports being legal in the country. In fiscal 2010, legal imports of mobile phones worth Rs 4,600 crore, escaped the VAT chain, indicating a loss of Rs 153 crore. The remaining Rs 235 crore of loss was on the back of loss of trade in the five states that increased the VAT.

Mahindroo added the grey market picked up due to lack of co-ordination between state governments and the VAT department. After import, which is legal, most handsets were sold in the grey market to avoid additional tax.

In 2010, VAT loss due to grey market sales is expected to touch Rs 400 crore.

The association said the government should restrict import to five major airports of Mumbai, Delhi, Chennai, Kolkata and Bangalore for better monitoring and superintendence.

There should be monitoring of imports and exchange of data with VAT commissioners immediately. Increase in VAT and related activities has also pushed money laundering in this business, Mahindroo wrote in the letter.

The association views VAT rates back to 4% or at best 5%, as the best solution to the issue. The association has also pointed out the threat from unbranded Chinese imports into the country.

Around 20 million unbranded Chinese phones worth Rs 4,200 crore entered the country last fiscal. This figure is expected to double, as in March alone, about 3.5 million phones worth Rs 700 crore were imported.

A serious issue against these phones is non-payment of VAT, octroi and entry tax. The weighted average impact of the same is about 7.5% to the country, he said.

These imports are also expected to impact the domestic manufacturing and create jobs in China at our expense, Mahindroo lamented.