Hike in excise duty on mobiles: An illogical step

The proposed hike of excise duty on mobile phones above `2,000 did not sit well with the Indian telecom industry. The FM has proposed to hike the duty to 6% from the current 1% in his budget for the year 2013-14. What this means is that customers have to stretch their wallet to another `100 if they buy a mobile phone that costs `2,000.

Though the intention of the FM, by proposing this step, is to bring in more revenue into 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.

As says Asim Warsi, VP, Samsung Mobile, "The increase in the excise duty on mobile phones will not have a positive impact on the mobile industry and would lead to an increase in prices for end consumers."

Two, in the last 2 years the buying behavior of Indian customers has changed. They have 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 in place of a feature phone. Increase of duty would impact this behavior.

Three, this action will discourage many other government initiatives where the government wants the consumers, mostly the 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 the population are unabanked. 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 mobile phones below `2,000 are unable to provide internet access, 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," says TM Ramakrishnan, CEO, devices, S Mobility.

Girish Trivedi, co-founder 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. It defeats 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 2 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 bottom line of handset makers.
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," says SN Rai, founder and director, Lava.