GST impact on smartphones

The past year has been incredibly eventful for the Indian smartphone and mobile industry. The launch of Reliance Jio brought 4G VOLTE to the masses, leading to increase internet speed and penetration. It also spurred the demand for 4G enabled smartphones, resulting in a smartphone sales boom. Another very notable development over the past year has been the growing dominance of Chinese smartphone manufacturers in the Indian market, who have all but wiped out India’s local vendors. Despite these sweeping changes, the Indian smartphone Industry has yet again been thrown into a state of flux and uncertainty with the introduction of GST.

So how, and to what extent will GST affect the Indian smartphone industry? And what does it mean for prospective smartphone buyers? Let’s find out in our today’s analysis.

What Is GST, And How Does It Relate To The Smartphone Industry?

The Goods and Services Tax (GST) is a multi-stage destination based tax which will be levied on every value addition. It is set to come into effect on 1 July 2017. It is a complete overhaul in the way the tax system works. Now taxes will be levied at each stage of the production cycle.

So how does this apply to the smartphone industry? Currently, individual states levy taxes at different rates on smartphones. Till June end, 29 out of 36 Indian states, along with seven union territories, have a VAT rate on mobile phones of 5% along with a 1% excise duty. This amounts to a cumulative tax of 6%.

GST will replace this current tax structure with a uniform 12% tax across state lines. What this means is that the introduction of GST will raise taxes by about 4-6% in these regions. However, due to the highly variable nature of the tax structure across different states, the change in prices is also likely to be just as variable. For example, states like Punjab, Rajasthan and Chandigarh have VAT rates of 8%-9% on smartphones. The introduction of GST is liable to have only a marginal effect on prices in these states.

On the flip side, states like Gujarat, Madhya Pradesh and Maharashtra have VAT rates between 12.5% and 15%. Therefore taxes will actually reduce in these states. If smartphone vendors decide to pass on these savings to their consumers, prices could actually end up dropping in these regions.

So, prices will increase by a small margin in most states, and may decrease in a few, right? Not quite. The situation is a bit more complicated as we think.

Prices May Not Increase In The Short Term After All

The smartphone industry in India is in a precarious situation at this point. Demand is high, and competition between the players is intense. Indian players are facing tough competition from Chinese vendors. Smartphone giants including Apple, Samsung and all Chinese vendors are trying too hard to gain a sizable share of one of the fastest growing smartphone markets in the world. In such a situation raising prices, even by a little bit, could cause these companies lose their edge as well as vital momentum.

It is clear that manufacturers would want to avoid this from happening, less they become targets of consumer ill will. Keeping this in mind, many manufacturers have decided to absorb the price increase instead. As a result, many current smartphones will not see much of a price increase, if any at all. Xiaomi, Oppo, Gionee and Lava have all confirmed that the price of their smartphones will not rise. Although not confirmed yet, sources claim that Samsung also intends to absorb the extra tax to maintain current price levels.

However, the new tax system will hit some smartphone companies harder than others. Under the new regime, imported mobile phones will be hit with an additional 10% customs duty. This decision was likely taken in an effort to preserve the advantage that local manufacturing currently enjoys, and to propagate further the “Make in India” Campaign. This decision would hit companies like Apple and Oneplus hard since the bulk of their inventory is still imported from China. Despite the fact that Apple recently started manufacturing iPhone SE in India, they are still heavily reliant on imports for the bulk of their smartphone sales.

Prices Will Likely Increase In The Long Term

Despite many of the positives effects, GST will bring about in the long term; it is causing some discomfort at the moment. Dealers are refusing to stock products of manufacturers that aren’t GST registered. There is also a lot of uncertainty regarding margins among retailers and distributors. As a result, many manufacturers have cut down on production by 10-15%.

Also, while it may seem like smartphone prices will remain stable for now, the same cannot be said for the future. Due to the additional tax, future smartphone models may end up more expensive than they would have been under the previous structure.

As such new entrants like Nokia now enjoy an enviable position. Their upcoming Nokia 5 and Nokia 6 models have already been priced with GST in mind. Consequently, they are not affected by the market uncertainty and fluctuations right now.

Takeaways

  • Most locally manufactured smartphones will likely experience no price hike in the immediate future.
  • The added customs duty could be bad news for Apple and Oneplus. Both companies import the bulk of their inventory and could be priced out of the market by the additional tax.
  • Smartphone prices will likely rise in the long term due to GST. Foreign manufacturers, in particular, will have to shift manufacturing operations to India or risk losing the market to local players.
  • The new tax structure may just help Indian vendors recapture the market from Chinese manufacturers.