Indirect taxes, as with any other industry, play a pivotal role as a catalyst in the growth of the mobile handset industry. Current regime the Indian mobile manufacturing players are reeling under cost pressures and low margins especially with Chinese players providing stiff competition.
At present, majority of the mobile handset companies have started their manufacturing facility in India, though import still continues to be the major way of managing the supply chain distribution. Currently, Customs duty, Countervailing Duty (in lieu of Excise), NCCD, Entry tax and Service tax (paid on procurement of services), all go in the costing of mobile handsets. With no offset available inter se few duties and taxes, margins have eroded as mobile handset companies find it difficult to reduce prices in this price sensitive Indian economy.
Obviously, the position of taxes under GST seems to be different. However, how different or helpful they will be to a mobile handset player is something we have tried to analyze in this article.
Imports – Will be a Expensive mechanism
Currently, following duties are imposed on import of mobile phones:
· Basic Customs Duty (‘BCD’) – 0%
· Countervailing Duty (‘CVD’) – 12.5%
· Special Additional Duty (‘SAD’) – 0%
· National Calamity Contingent Duty (‘NCCD’) – 1%
With the introduction of Goods and Services Tax (‘GST’), all taxes except BCD would be subsumed. The rate of GST hopefully should be 18% and thus, the duty payable by the importer will drastically increase.
Tax on Handsets to increase
Currently most states classify mobile handsets in the lower tax slab i.e. 5%. Under GST, the rate of tax would drastically increase to 18-20% (in case there are no multiple tax rates).
Stock transfer – Taxable, yet cost effective
Currently, majority mobile handset companies operate from warehouses in every state via stock transfer (through statutory forms) and thereafter sell goods locally to the distributors. This is done with the intention to avoid payment of non-creditable CST and in order to pass the creditable VAT to their distributors. Post GST, inter-state stock transfers will attract IGST. As credit of IGST will be available (read above), there may not be any requirement of stock transfer.
Mobile Phone Barter – May loose its charm
Mobile handset companies keep introducing promotional schemes allowing old mobile phones to be exchanged with a new one (post paying the differential value). Value of old mobile phone is determined according to various conditions and eventually reduced from the value of new mobile phone. Currently, the amount reduced on exchange or barter is outside the ambit of VAT (except states such as Gujarat which have specific inclusion).
The Model GST law has included ‘barter’ in the definition of ‘supply’. Consequently, every transaction involving an exchange of mobile phone will be subject to GST.
CENVAT Credit – Not to be reversed
At present, mobile companies are required to reverse majority of CENVAT Credit (assuming they render certain taxable services). The reversed CENVAT Credit becomes a cost to the Company. Under GST, entire credit of services would be allowed to the Company. Though, procurement of service/ goods would become expensive (due to increase in tax rate), however the total input GST credit would be available with the Company to discharge its output GST liability. This would provide great benefit to the Company and should impact the pricing of the product.
Valuation Mechanism – Copying is Dreadful
Since inception of mobile handset companies in India, they have been subject to valuation on the basis of MRP (for Customs). However, domestic transactions are mostly carried out at transaction value. Under GST Model law the concept of MRP is proposed to be replaced with the ‘transaction value’ method (scope of which is enlarged).
The above mentioned are an indicative list of issues that would impact the mobile handset companies. The mobile handset companies are going to benefit in certain area (such as import duty being creditable and CENVAT Credit being available) and adversely impact in certain areas (such as transaction value or rate of tax). This it is imperative that such companies not only spend time on transaction structuring, warehousing, supply chain, IT system, contracts renegotiating but also spend ample focus on determining the current value of handsets that will be subject to the transaction value. As implementation of GST with effect from July 01, 2017 is now confirmed, having five months in hands the mobile handset companies should gear up and leave no stone un-turned.
The article is authored by Nimish Goel, Head of Indirect Taxes and GST at International Business Advisors.