Mobile handset manufacturers with assembling units in the country are a worried lot over what shape the final Goods and Services Tax regime will take. Their chief concern is that under the GST structure, all indirect central and state taxes, including excise duty, sales tax, service tax and value-added tax, will be subsumed into a single rate, so the concessions currently offered by different states, will come to an end. Also, since the differential between domestic manufacturing and imports will end, the incentive for local production could be undermined.

The manufacturers are planning to seek clarity from the government on the final duty structure. They plan to suggest that the states levy a GST of 5% across the country. The chief demand will be that the differential between domestic manufacturing and imports is maintained and the benefits given by states are retained.

“It’s work in progress. How it will shape up is not clear,” Pankaj Mohindroo, founder of the Indian Cellular Association, the apex body of handset makers, told FE. The industry association that counts Apple Inc, and Samsung Electronics, to home-grown companies Micromax Informatics and Intex Technologies, plans to send in its proposals to the government later this week, he said.

“How do they (the government) differentiate for incentivising manufacturing in India is not clear,” Bipin Sapra, partner for indirect taxes at EY, said. “All other incentives…all of them are up for reckoning in GST. They will have to create a mechanism for incentivising manufacturing in India,” he said.

In last year’s Budget, the finance minister had imposed a 12.5% countervailing duty (CVD) on mobile phones that were imported compared with a 1% excise duty for those made in India. GST is a destination-based tax on consumption, it will not be possible for states to continue to give the VAT exemptions they have given today. And since the GST will subsume all taxes, the excise/CVD advantage given by the Centre to local manufacturers will also be difficult to retain · though the Centre can keep the GST rate lower for mobile phones as compared to the standard rate, this will apply to both imports as well as local manufactures.

However, some analysts feel that the industry need not unduly worry about GST taking away their tax sops, as the elimination of cascading of taxes in the GST regime would somewhat address the issue of increased tax liability due to higher rates. For instance, currently, the 1% excise duty is without input tax credit on raw materials and capital goods, which practically takes the incidence to around 4%. Then comes the state VAT which is in the 5-15% range.

As many as 20 firms currently have handset factories in India. These include Taiwanese firm Foxconn, which has recently set up one-million-units-a-month handset facility at Sri City in Andhra Pradesh; US-based Flextronics with a unit at Sriperumbudur in Tamil Nadu; South Korea’s Samsung Electronics and China’s Vivo, both with their plants in Noida, outside Delhi. The concerns over the GST regime have come at a time when handset production in India is projected to double in the current fiscal year from 100 million units in FY16.

Several states including Tamil Nadu, Haryana, Andhra Pradesh and Karnataka currently levy VAT on handsets at 4-5%, while the rate goes up to 15% in Gujarat and Assam.

Andhra Pradesh had offered complete exemption from VAT for Foxconn, which set up a handset factory in the state last year. The Taiwanese company wants the Centre and states to remove the ambiguity over whether the tax sop would prevail in the GST regime.