• Ajay Sharma

The Corona Virus & GST’s Double Whammy

Updated: Mar 17, 2020

मोबाइल फोन उद्योग को कोरोना वाइरस तथा जीएसटी का दोहरा झटका

 

It all started in China, and now the mobile phone industry in India too is going through tough times indeed.

All seemed well before the start of the Chinese New Year, at least in India, and then it happened fast and hit hard. Factory shutdowns by the Chinese government, labour not coming to work, production of components stalling and the supply chain getting disrupted badly.

The Mobile World Congress (MWC), the biggest event for Mobile Phones, had to be cancelled, leading to launches of models by brands getting delayed, stock shortages with little or no replenishment and now, suddenly, things do not look the same. The expected growth in the world’s second-largest and the only growing market in the top 3 seems tough.

Just when China was getting its act in place, the action shifted to India last week with the Government increasing the GST on Mobile Phones from 12% to 18%. The reason given was the rationalisation of the inverted GST structure with the components attracting a18% GST while the finished product was at 12%.

While the Corona effect was not in the hands of governments, the increase in GST was. If I could think of a couple of options, I am sure people at the top could think of many more.

1. If it was an issue of rationalisation, the component GST could have been brought down to 12% at par with the finished product, in this case, Mobile Phones instead of increasing the GST on Mobile phones to 18%.

2. Creating 2 slabs as in the case of televisions of having a differential GST of 12% on mobile phones below Rs. 12,000 and 18% above Rs. 12,000. Why Rs. 12,000? That is the ASP for smartphones in 2019 as per IDC and the price range for mass adoption.

The timing is just not right in terms of the struggling economy of the country or the #CoronaVirus issue severely affecting the stock market and customer walk-ins or the mobile phone industry being one of the few major industries which was still performing better. Frankly the status quo should not have been disturbed.

Beyond these , there are enough and more reasons for the Industry to oppose this GST hike.

1. Profitability is a big issue in the industry with all brands except #Samsung in the top 5 making losses.

a. The Indian rupee is depreciating against the USD and with no increases in prices on this account, the expected profits were still far away.

b. Component factories being closed and production cuts in China led to a surge in the prices of several components. The increase in customs duty on imported components announced in the Union Budget was also putting pressure on the “margins”, if you can use this word.

2. An increase in the GST would push the prices up which could lessen the demand from new customers upgrading to smartphones or existing customers taking longer to change their phones. The first reason goes against the vision of “Digital India”, which requires an increase in smartphone users/penetration. More people access the internet on smartphones than PCs.

3. If the demand in India gets affected the “Make In India” programme gets affected. Any negative impact on the Make In India programme could potentially thwart the entry of component factories in India which would have brought investments, employment and technology to India.

4. With a stunted growth, even existing employees are in danger of losing their jobs forget about their personal growth.

5. It is a known fact and we have enough evidence from the past that high taxes/duties encourage the grey market. That can hurt the government revenues rather than increase them.

6. To quote Mr. Pankaj Mahendroo Chairman of ICEA in The Indian Express, “ The move will be extremely detrimental to the vision of Digital India. Consumption will be stymied and the expected consumption target of USD 80 billion (Rs. 6 lakh crore) by 2025 will not be achieved. We will fall short by at least ₹2 lakh crore.”

7. Last but not the least is the fate of the small and medium retail which form the bulk of the Indian offline channel already facing multiple challenges from alternate channels and poor walk-ins. If sales suffer, they will be the worst hit. We may see more exits by them and some more bad debts for distributors working on very thin margins from the leading brands.

8. The loss to Retail – If not compensated by brands – of 6% with an input credit of only 12% and output of 18%. Small and medium retailers will not be able to absorb the shock. While I do understand that if this is compensated by brands it stands as a loss to them but possibly they are in a better position to bear it.

The loss in volumes and a no increase in ASP due to higher pricing could offset the incremental GST revenue estimated by the government with the GST increase. Isn’t the option of growth with lower GST better considering the points mentioned above?

A rethink of the decision for an industry which contributes immensely to India’s GDP and offers high employment directly or indirectly is what is urgently required.

The industry has faced many challenges for brands and for channels and each of them has tried to fight on their own. Here is one challenge which affects the entire value chain -brands, channel and the customers. And they have to all come together on this with the help of the respective associations.

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