With the Centre thinking about imposing customs duty on import of mobile phones, the telecom industry has cautioned that phone-makers may import from countries with which India has signed Free Trade Agreements. If that happens then it could be detrimental to the ‘Make in India’ campaign as phone makers will not give any incentive to assemble phones in India.

Under the existing tax structure, there is a 10 per cent cost arbitrage in favour of making phones in India compared to imports. However, this gap will reduce to zero under the proposed GST regime from July 1. In order to keep imports expensive, the Centre is looking to impose a 10 per cent customs duty on smartphones. This could, however, draw the ire of the WTO as India is signatory to the Information Technology Agreement that prohibits customs duty on certain items on its list.

While smartphone per se is not on this list, it mentions that any device used for the purpose of telecommunications cannot be taxed. Though the Centre is yet to decide on whether to go ahead with the duty, industry experts said that even if the customs duty is imposed, it may not help as phone makers can still import without paying duty under the FTA from countries such as Thailand, Vietnam and Malaysia.

In a letter written to the Department of Telecommunications, industry body Broadband India Forum has highlighted how charging 10 per cent customs duty on mobile phones could become a legal issue for the government since India is a signatory to Free Trade Agreement with several countries from where these phones could be imported.

India had also signed the FTA with Singapore, Thailand, Vietnam, Malaysia, Myanmar, Indonesia, Brunei Darrusalam and Lao People’s Democratic Republic in 2011, which restricts India from charging any customs duty as well from these countries. The only condition is that the products should have had at least 30 per cent value addition in the country, to avoid the countries turning into trading hubs.

“In view of these facts, India cannot impose customs duty on import of smartphones from any of these countries without incurring serious legal challenge or retaliatory actions from those countries,” the letter, a copy of which was seen by BusinessLine, said.

“Not imposing import duty in these cases, if India tries to levy customs duty only on imports from other countries, then serious issues of circumvention of this through arbitrage and routing supplies through FTA countries. Thus not only the basic objective of government in this measure would be defeated but, more importantly, other major challenges could arise.”

Advantage Vietnam

The biggest gainer from this would end up being Vietnam, which has local value addition in mobile manufacturing of over 35 per cent, allowing it to export phones to India without any customs duty.

A recent EY report said that instead of tweaking the customs duty a better way to deal with the situation would be to a separate mechanism for incentivising handset-makers can be recommended wherein the manufacturers can be granted relief by way of refund of GST that is equivalent or more than the incentives available under the current regime.

“This would encourage manufacturers to increase the local value addition in India and create additional incentives for building a component ecosystem for mobile handset manufacturing in the country,” the report said. – The Hindu Business Line


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