Jan 30, 2014

Duty hike on mobile phones : An illogical step

Date: 30 January, 2014

The proposed hike of excise duty on mobile phones above Rs 2000 did not go well with the Indian telecom industry. The FM has proposed to hike the duty to 6% from current 1% in his budget for year 2013-14. What this means is customers have to stretch their wallet to another Rs 100 if they buy a mobile phone that costs Rs 2000.

“On mobile phones priced at more than Rs 2,000, I propose to raise the duty to six per cent,” Chidambaram said in his budgetary speech. For mobile phones below Rs 2000, the duty remains at 1%.

Though the intention of the FM, by proposing this step, is to bring in more revenue to the exchequer, in reality it may boomerang. The proposal, if passed, will do more harm than good. One, it will directly affect the purchasing trend of the Indian consumers, who are planning to become the first time users of mobile phones.
“The increase in the excise duty on mobile phones will not have a positive impact on the mobile industry and should lead to an increase in prices for end consumers,” says AsimWarsi, VP -Samsung Mobile.

Two, in the last two years the buying behaviour of Indian customers were changing. They had just started to dump the idea of buying a phone that can let them do just the basic functions like talking and sending text messages. They have started to think of buying an entry level smartphone inplace of a feature phone. Increase of duty would impact this behaviour.

“We do not see the Budget reviving the consumer sentiments in the absence of any specific incentives to boost consumer sentiment itself,” Warsi added further.

Three, this action will discourage many other government initiatives where the goverment wants the consumers, mostly rural population to use the mobile phone to access services like education, health and banking. For example mobile banking is a huge opportunity in India where 40% of population areunabnked. Stakeholders like the RBI, the banks, handset manufacturers and operators are actively pushing this business to flourish. Increasing the cost of devices that can help this business to grow may discourage consumers to use these services. And most mobvile phones below Rs 2000 are unable to provide internet acess, which is a must to get these public services.

“This decision will surely impact the industry’s focus on making smartphones more affordable. At the same time, rural areas might get that much more difficult for smartphones to penetrate” said T M Ramakrishnan, CEO-Devices, S Mobility.

GirishTrivedi, cofounder of Monk consulting, a research firm working in the area of telecom has a similar opinion. “I do not see a logical reason of this duty hike,” he opines. “It deafeats lots of other purposes that the government has for rural people associated with mobile phones and internet usage,” he adds.

Besides, this action has the potential to encourage growth of grey market. For the last two years the grey market for mobile phones was on a decline but increasing the price of mobile phone might encourage this as it has a direct impact on the bottomline of handset makers.

“The handsets industry is facing difficult times with increased competition and price wars at large. With the proposed increase in tax for handsets above Rs.2,000, we do not see a decrease in demand but definitely, there will be pressure on the margins,” says Ramakrishnan of S Mobility.
The handset makers are also disappointed with proposal as they are of the opinion that they are left with no other option to increase the prices. “The mobile phone segment is very competitive. But we have no option but to increase prices. It is a hard Budget for the mobile phone segment,” Lava Founder and Director S N Rai said.

Source:Voice&data (http://www.voicendata.com/voice-data/analysis/175505/duty-hike-mobile-phones-an-illogical-step/page/2)

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