India will begin imposing basic customs duty (BCD) on smartphones of 10% from July 1 making imported devices more expensive than locally made ones, a move that will bring relief to international investors like Foxconn and iPhone maker Wistron, as well as Indian companies that have invested heavily in setting up factories in the country.
The move will stimulate investments of more than Rs 1,000 crore that have been on the fence for lack of clarity on the price differential incentive as India shifts to the goods and services tax (GST) regime. Before GST, the duty structure made imported phones more expensive than locally made ones, but that difference was set to be evened out after GST. An additional duty for maintaining local manufacturing advantage was being demanded by the industry for months now.
ET had reported on June 15 that the government was thinking of implementing the additional levy before the rollout of the country’s most comprehensive indirect tax reform on July 1.

In a notification late night on June 30, the department of revenue said that the government took the decision “on being satisfied that it is necessary in the public interest so to do.”

The government added, in a press release issued in early hours of July 1, that 10% BCD had been imposed on “Cellular mobile phones and specified parts of cellular mobile phones like charger, battery, wire headset, Microphone and Receiver, Key Pad, USB Cable etc.”

The Government had constituted Inter Ministerial Committee comprising of officers from Ministry of Electronics and Information Technology (MeitY), the Department of Commerce (DoC), Department of Telecommunication (DoT) and  Department of Revenue (DoR) to identify electronic / IT / telecom products, which are not Information Technology Agreement [ITA] – I bound, for customs duty enhancement on them, it added.
The decision to impose BCD would also clear any roadblocks in the way of a long-term manufacturing roadmap that offers tax benefits to those making mobile phone components within the country. It would also increase local value addition to 35-40% from the current 6%. It would also lend a helping hand to India becoming an export hub for existing players like Samsung, and for ecosystem players from China, Taiwan and other markets to come and invest in India.

“The replacement of differential duty with BCD will protect and enhance India’s credibility about its resolve to build a robust mobile phones and component manufacturing industry,” said Pankaj Mohindroo, president of Indian Cellular Association that represents handset makers including Samsung, Apple and others.

“The 500 million production target for 2019 will become a reality with this and a few more critical measures like an appropriate export promotion dispensation,” he added As part of the notification, the government has imposed the 10% levy on rubber and metal items, including screw, used for manufacturing of mobile phones, but exempted a number of other parts such as printed circuit board assembly, camera modules, connectors, display assembly, touch panel and ringer from any duty. Parts used in making them locally have also been exempt from customs duty.

Imports on parts for 31 sub parts in a mobile phones and base stations, used by telecom network providers, will have no customs duty, as per the revenue department’s notification.
The government’s decision on BCD should come as a shot in the arm for Make in India, with mobile phone manufacturing being the bedrock of the programme. More than 70 mobile phone and component companies currently make in India for the local market.

Among the most recent entrant is contract manufacturer Wistron Corp., which makes the Apple iPhone SE at its Bengaluru plant. The world’s largest contract manufacturer Foxconn has set up five assembly plants in Andhra Pradesh and is building another in Maharashtra. The world’s largest phone brand Samsung has announced an investment of Rs 5,000 crore to double mobile phone manufacturing by 2020.

About 175 million handset units valued at Rs 90,000 crore were produced locally in FY17, up from more than 110 million handsets worth Rs 54,000 crore in the previous year, according to the Indian Cellular Association (ICA). As much as 80% of the phones sold in India in the March quarter were locally made, as per Counterpoint Research.

The government has taken this view after seeking legal opinion from the attorney general that smartphones were not covered by the Information Technology Agreement and the country could impose customs duty on them. ITA is a global agreement under which countries have committed to exempt certain electronic and telecom products from customs duty. ITA was signed in 1996 when smartphones did not exist and hence cannot be given zero-duty status, as per the legal opinion.
The IT ministry has been saying that the government will ensure that the incentives for local manufacturing will remain intact even under GST. Existing tax structures make smartphone imports 11.5% costlier than India-made handsets, creating a duty differential that incentivised local manufacturing. But a 12% GST rate on mobile phones would have wiped away the advantage.