Domestic handset makers to get GST tax shield against imports

Govt seeks to protect local industry without raising customs and contravening terms of ITA

The finance ministry has decided to grant mobile phone manufacturers tax cover almost at par with the current regime under the Goods and Services Tax without the need to raise basic customs duty.

“Under GST, the government has the right to impose tax on imported goods. This is clearly laid out in IGST rules”, said a senior finance ministry official.

The assurance is likely to soothe major concerns of the IT manufacturers who have asked the government to provide them a tax shield against imports of mobiles from countries, especially China. The government wants more companies from India and abroad to set up shop in India to make the entire range of mobile phones for a 1.25 billion population, in its bid to move to a digital economy at a fast clip.

​The assurance from the finance ministry  will also ensure India does not fall foul of an international agreement to lower customs duty on information technology products.

More than 30 per cent of the mobiles sold in India are imported, including the high-value ones. Even those in the lower price range are mostly imported and priced at least close to Rs 4,000, while successive government and industry committees have sought entry-level ones to be priced not morer than Rs 2,500 to encourage mass purchase from the lower income population. This can only happen if those phones are made within India.

There has been a problem in making this happen, with the planned roll out of the GST this financial year. Once GST is in place, the protection so far offered by countervailing duties ​​for domestic manufacturers ​(technically an additional customs duty) will be erased.

A concerned Ministry of Information Technology had asked the Attorney General to advise if the basic customs duty can be pulled ​​up​ ​from the current zero rate. India is a signatory to ITA (Information Technology Agreement) from 1997. ITA is meant to encourag​e ​​global ​trade in IT products. A key component of the agreement is nil basic customs duties on all IT products which India too has done. One line of argument has held that India can claim that the latest generation mobiles phones were developed after it had signed on the ITA agreement. This means that these new technology based phones should be part of a subsequent ITA-II list. Attorney General Mukul Rohatgi had advised that India has the right to raise its basic customs duty in the circumstances. But ​S​ Madhavan, co-chair of Ficci’s GST committee said India should not breach the ITA as it would hurt the country’s position on corresponding treaties, globally.

The finance ministry official said while the AG had offered a correct opinion based on the interpretation that India could raise the rates upto the limits of what is known as bound rate, it will not be necessary to walk down this path. The ministry is also likely to invoke the interpretation made by a Supreme Court in the SRF case to bolster its position. The court had held that CVD would be applicable even if there is no refund of duties involved—in other words a successor to CVD which is IGST can be put in place to protect domestic mobile manufacturers, and importers will not have the legal space to challenge it. The CVD was imposed for domestic industry in 2015 and has become a sort of magnet to draw in manufacturers. It ensures they can manufacture, some of the components, albeit low value addition ones without facing competition from cheaper imported mobiles.

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According to industry research body, Cyber Media Research the country's mobile and component manufacturing has risen by 22 per cent in calendar year 2016 to Rs 1,359.9 billion. So the stakes are massive. Madhavan agreed with the finance ministry’s position that there is room within GST to offer support to the domestic IT manufacturers. The power to do so come from section 269A of the amended constitution of India, which gives the centre authority to levy such taxes. “Tinkering with the customs duty will offer a short term advantage that will be fool hardy to deploy”, the former head of indirect tax practice at PwC said.

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Another ministry official said that despite the setting up of an inter-ministerial committee the issue, would be resolved​ sooner​, once they explain the correct position under GST. An IT ministry official said they too ​were veering round to this position​ of not tinkering with the customs duties​.