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Phone Makers Taking Advantage Of India’s Free Trade Agreement To Avoid Import Duty

The government’s attempts to reduce dependence on electronics imports and make India a manufacturing hub by slapping hefty import duties have led many companies to set up assembly lines in the country. But it has also given rise to imports from Vietnam, an emerging manufacturing hub.

It appears that phone manufacturers have been taking advantage of a free trade agreement between India and ASEAN (Association of South East Asian Nations) countries, to import components, including circuit boards from Vietnam, to bypass the 15% import duty that they have to pay on components imported from China. The import duty on a fully assembled smartphone is 20%.

Signed in 2009, the free trade agreement reduces or exempts tariff on the flow of a wide range of goods, including electronics, between India and the ten member nations, which include Vietnam, Malaysia, Singapore, Thailand, and Indonesia.

According to an ET report, Indian Cellular and Electronics Association, wrote to the Ministry of Electronics and IT informing them that the companies in India imported mobile phone components worth more than $1 billion from Vietnam in the first half of the current fiscal compared with $800 million in 2018-19 and $600 million in FY2018. The association has requested the ministry to re-evaluate all current duties under the phase manufacturing programme.

According to a November report by PHD Chamber of Commerce, India hasn’t managed to turn these free trade agreements with ASEAN countries to their advantage and the imports from have risen much more than the exports to them. The findings show that India’s exports to ASEAN increased to $36 billion in 2018 from $23 billion in 2010, while the imports jumped to $57 billion from $30 billion in 2010, reflecting a trade deficit for India. As per preliminary statistics released by the General Department of Vietnam Customs, the southeast Asian country’s export turnover to India was $5.1 billion alone in the first nine months of 2018.

“Vietnam has successfully established itself as a very competitive manuf hub for all categories due to various initiative by the govt like Corp tax, skilled manpower etc. It is a serious threat to India as an alternate manuf and export hub to China,” added Singh.

After the increase in import duty on components and smartphones, several original equipment manufacturers including Xiaomi, Samsung and also Apple started assembling their phones in India instead of importing a finished unit from China.

The iPhone XR is being assembled and will also be exported from India, Electronics and IT Minster, Ravi Shankar Prasad had announced in a press conference in November. According to an August report by ICEA, 95% of smartphones sold in India in 2019 were produced locally. The total number of manufacturing units in India has grown to 268 in 2019 from 2 in 2014.

A case in point is the PCB (printed circuit board) which accounts for 50% of the cost of a smartphone, which is still imported. Kawoosa feels, India needs to have interventions beyond tweaking duty structure.

It is not that it isn’t effective, but the issue is how robust it can be. The government should find more long haul measures. – Livemint

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