Existing Tax Regime
In the year 2016, the total volume of mobile phones manufactured in India has peaked to 180 million units (IIMB – Counterpoint Report of Nov 2016). This is a 125% increase compared to the previous year. This has resulted in a total industry turnover of $ 11.6 billion and helped in the creation of 50K jobs. The exponential increase is due to the incentive proposed by the government in the budget of 2014-15. In this budget, the finance ministry had proposed a concessional excise duty rate (output tax on manufactured goods) of 1% on phones manufactured in India, whereas, those imported were charged @ 12.5%. Also, all components used for manufacturing mobile phones were exempted from customs duty. This differential duty structure has increased the cost of importing mobile phones from outside compared to those manufactured in India by approximately 10%. Later on, to promote manufacturing of some key components of mobile phones, the government in the budget of 2015-16 raised the customs duty for chargers, batteries, and headsets from 0% to 12.5% and brought them at par with the mobile phones.
GST Regime Announced
Then in the middle of this year (2016), the government announced that from 1st April 2017 it will migrate the current tax regime to a more efficient Goods and Service Tax (GST) regime. The purpose of GST is to remove the cascading effect of the current tax structure on the overall prices of goods & services. For example, in the current model, customs duty increases the cost of goods, as it is not deductible from the output tax (excise, sales tax, VAT etc) to be paid subsequently by manufacturers, traders, and distributors. On the other hand, GST reduces the tax burden on all intermediaries by allowing them to deduct their input tax liabilities from their output tax. The consequence of this is far-reaching, as the proposed GST system will make the current incentive structure to promote manufacturing in India totally dysfunctional.
