Make in India for mobiles: Will GST dial trouble for handset makers?

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Updated: May 3, 2016 7:36:00 AM

Retaining differential CVD will be critical

Since 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. (Reuters)Since 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. (Reuters)

Foreign mobile handset makers that have set up assembling units — and lately manufacturing facilities — in India relying on various indirect tax concessions from the central and state governments fear that these incentives could go away once the goods and services tax (GST) regime is introduced. Unless policymakers give an assurance that the existing incentives of low excise duty and concessional state VAT rates would stay in the GST regime, many of these players would be forced to review their investment plans, sources in some of these firms told FE — 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.

Since 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.

“We require clarity on (what would be the tax incidence on handset makers in the GST regime),” Pankaj Mohindroo, president of Indian Cellular Association told FE. “Many things, operational things have to be ironed out,” he added.

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. “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,” said Sanjay Garg, partner, indirect tax, KPMG.

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.

Prior to Budget 2016-17, import of almost all mobile handset accessories did not attract any import duty while domestic manufacturing (assembling) was subjected to concessional excise duty of 1% without the facility of Cenvat credit. Since this was not leading to shifting of core manufacturing activities to India by foreign players (the value-addition in assembling was less than 10%), the Budget, while retaining the 1% excise duty on domestic manufacturing, imposed import duties on chargers, adapters, batteries, wired headsets and speakers, taking the cumulative tax incidence (including basic customs duty, countervailing duty of 12.5% and special additional duty of 4%) on these products to 27-28%. Finished handsets, however, attract only the countervailing duty at 12.5%, with 30% abatement.

The Budget, sources said, reinforced the case for foreign handset makers to increase their value-addition levels in India; in some cases it is already 30%, according to an industry source.

Andhra Pradesh had offered complete exemption from VAT for Foxconn, which set up a handset factory in the state last year. The Taiwanese company, according to a source with direct knowledge of the matter, wants the Centre and states to remove the ambiguity over whether the tax sop would prevail in the GST regime. “The government should provide clarity on the GST roll-out timeline and the tax structure so that manufacturing companies can redo their business plans accordingly,” the source said. “As long as it (GST) does not incentivise imports, it’s OK,” the source added.

According to ICA’s Mohindroo, the state governments will have to retain the incentives offered when companies signed up agreements to set up their plants. “They will have to have a refund mechanism in the state GST (if the rates prospectively goes up),” he said.

However, allaying industry concerns on GST implementation, Aruna Sharma, secretary at the department of electronics and information technology, told FE: “When the GST comes into being, the current tax exemptions will be subsumed. We will work that out.”

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