Rationalise tariff on mobile parts to encourage other countries: Industry

Vietnam's weighted average tariff, taking into consideration its sprawling FTAs with countries, is a mere 1.1 per cent against India's 7 per cent

PLI schemes
The solution suggested is rationalising tariffs on components to encourage exports and shifting global companies to India
Surajeet Das Gupta New Delhi
4 min read Last Updated : Jul 06 2023 | 11:24 PM IST
The message is clear. India’s high and increasing import tariffs between 2020 and 2023 have made mobile device manufacturing less competitive than in other countries, and have “negated the impact of incentives” like the production-linked incentive (PLI).

A report released by the Indian Cellular and Electronics Association (ICEA) and Mobile and Electronics Devices Export Promotion Council on Thursday said the increase in import tariffs on components to make mobile devices between 2020 and 2023 had led to an escalation in the cost of materials by 5.59 per cent and the cost by 3.6 per cent.

It said the government had provided a financial incentive scheme ranging from 4 per cent to 6 per cent on a sliding scale for five years to mobile device manufacturers, and that was “being supported by indirect revenue from increased indirect taxes from the same sector, thereby increasing the costs for the same”.

To put it simply, what the government is giving as incentive (Rs 1,644 crore till now as PLI), it is taking back in many ways from device makers (through higher tariffs). And an increase in goods and services tax by 6 percentage points after the PLI was introduced in 2020 has helped in ringing up additional revenues of Rs 42,897 crore in 2021-23, which is far more than the PLI allocation of Rs 38,601 crore for mobile devices. Its strategy to use high tariffs to encourage domestic players to manufacture components has not taken off, either.

The report titled “A Comparative Study of Import Tariffs in Electronics”, co-written by the ICEA and IKDHVAJ Advisers LLP, said even assuming that 45 per cent of mobile device production would be exported by FY26 and duty drawbacks (import duty paid given back for exports) were claimed on them, the average increase in cost would range from 3.2 per cent to 3.4 per cent on materials only because of higher tariffs.

It pointed out competing countries like Vietnam had similar tariff-exemption schemes for export but they had a higher ratio of exports, which accounted for 85 per cent of production. That apart, Vietnam has over 85 per cent of its components under free-trade agreements (FTAs) or with zero duty. As a result, “when a company is looking at reallocating to India it would consider a cost disadvantage of 3.6 per cent vis-a-vis Vietnam only due to tariffs” and that is a “large cost disadvantage which a PLI scheme cannot compensate”. Adding to the woes of the industry is that lower tariffs shield economies from currency depreciation.

Between January 1, 2022, and March 31, 2023, due to the depreciation of the currencies, the difference between the effective tariff of India and that of China was 7.6 per cent and that of Vietnam 4 per cent.

The solution suggested is rationalising tariffs on components to encourage exports and shifting global companies to India.

Looking at the broader aspect of tariffs across five competing countries, a comparison of 120 tariff lines in mobile manufacturing shows that India’s “most favoured nation” (MFN) average tariff is the highest at 9.7 per cent compared to China (3.2 per cent), Mexico (3.5 per cent), Thailand (5 per cent), Malaysia (5.2 per cent), and the Philippines (3.9 per cent).

Vietnam’s weighted average tariff, taking into consideration its sprawling FTAs with countries, is a mere 1.1 per cent against India’s 7 per cent.

The other fact is that in the top 24 tariff lines identified by the industry, and they account for the bulk of the cost of production, including sub-assemblies and components of mobile phones, India is at the bottom of the pecking order among the five with only seven lines with zero duty compared to 18 of China, 16 of Mexico, and 15 of Thailand and Vietnam.

But the cost disadvantage is again seen when MFN tariffs in 14 lines for India are above 15 per cent, but for other countries there are no tariff lines in this category.

Topics :tariffsimport tariffsPLI scheme

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