Three-time tax hike to hit rural mobile segment

Written by Rachana Khanzode | Mumbai | Updated: Jun 9 2009, 05:37am hrs
The increase in tax rates of mobile handsets, cordless phones and video phones by the Maharashtra state government from 4% to 12.5% does not augur well for end users. The state added 8,99,646 subscribers in April 2009 to reach a total subscriber base of 32,244,969. About 60% of the total net additions in a month come from the rural areas and analysts in the industry believe that the move is expected to impact this segment the most. These are expected to move towards the second-hand or grey market, thus impacting the handset manufacturers like Nokia, Samsung, LG and Motorola, amongst others.

Girish Trivedi, deputy director, ICT practice, Frost & Sullivan, said, The impact will largely depend on how the handset manufacturers react to it. If the additional costs are passed on to the consumer, then the subscribers from the rural areas, who are price sensitive, will be impacted the most. The second-hand and grey markets have most of the handsets that are available at dirt-cheap prices, thus impacting the overall sales of the manufacturers. If manufacturers bear the additional tax costs, it will impact the over all margins of the company.

Though manufacturers work up on the scale of volumes in India, an 8.5% increase will definitely impact on the margins. This is also because almost 80-85% of their components are imported in India and only assembling takes place out here, added Trivedi. Manufacturers are already facing pressure on their margins in developed markets and the developing markets like India drive much of their profits at the moment.

According to the Indian Cellular Association, the Maharastra government collected Rs 140 crore value added taxes (VAT) in the year 2008-09 at the first stage and this is expected to reach Rs 170 crore this year, at the current tax rate of 4%. New tax reforms would shrink current estimated organised market from 125 lakh to 8 lakh thus bringing in losses of Rs 134.5 crore to the state. The ICA is thus approaching the state government and will be proposing it to continue with the existing tax rates.

At the moment, handsets that give a better 3-G experience cost a minimum of Rs 15,000 and could go up to Rs 35,000. The middle-class will have to shell out more to buy these handsets as 3-G is expected to be in India in the next one year. In a recent press conference held in Mumbai, Shankar Subramanian, director retail-India, Nokia India, said, We constantly try to make our handsets affordable and already some of our 3G handsets at the moment are available for as low as Rs 5,000 to Rs 7,000. Recently, bodies like CDMA Development Group (CDG) have also been working ton to reduce the rates of basic handsets. Recently, James S Person, COO, CDG, said, The handset rates in India are quite cheap and there isnt much room for further cut. However, we can expect some correction in mid-level handsets and 3G enabled phones.