GST hike adds to woes as coronavirus outbreak derails smartphone industry

The government recently raised the Goods and Services Tax (GST) on mobile phones from 12% to 18%. Experts and industry bodies are of the opinion that the move will have an adverse impact on the smartphone industry which is already been facing a crisis in the wake of the global coronavirus outbreak. The hike in GST may also lead to companies raising the prices of their handsets.

"With 18% GST, the extremely price sensitive Indian consumer will either delay their purchase or buy in the grey market. The 18% GST hike will also bring back the bad old days of early 2000s when the grey market in mobile phones was rampant at 90%. It reverses years of painstaking efforts by governments and industry to increase mobile manufacturing and penetration by sensible policy interventions and tax rationalization," said ICEA in a release earlier this week.

According to Parv Sharma, research analyst at Counterpoint, a 6% increase in GST will lead to an increase in the retail price of the smartphones launched before April 1. He added that the phone companies will need to adjust the Bill of Material (BoM) of the new smartphones to accommodate the price increase.

"Even if they increase, it won't be exactly visible to the consumer. However, brands will have to re-calibrate the cost structure and end-pricing, considering consumer's willingness to pay. In the short term, consumers may opt for the slightly cheaper model instead of a more expensive model. So, it will be more of a waterfall effect, but consumers won't stop buying phones," he said.

Double whammy: GST, Coronavirus outbreak

Smartphone companies were already bracing for a big blow due to the coronavirus outbreak. It's worth noting that most of the firms, including the likes of Apple, were dependent on China for manufacturing and supply. For instance, Apple has already lowered its revenue projections for the quarter.

According to research firm TrendForce, smartphone productions could see a dip of 12% in the first quarter of 2020, compared to the same period in 2019.

While it's not difficult to correlate the lower production and imminent lower sales, lockdowns such as shutting down of retail stores and public gatherings amid coronavirus outbreak will also hurt these smartphone makers. Another research firm Canalys said the smartphone sales in China could go down by as much as 50% this year due to the coronavirus outbreak.

For smartphone companies in India, the GST hike can make things more difficult for them.

Dinesh Sharma, Mobile Business Head, Asus India pointed out that the 12% GST was very close to the average of VAT on phones. This helped facilitate a smooth price transition for phone companies to the GST regime.

"Smartphones are a key necessity and a very low margin, high volume, highly competitive business. The incidence of tax will directly have to be passed on to consumers. Higher taxes, coupled with rupee depreciation and higher input costs due to the impact of COVID-19, will lead to a significant escalation in prices and will affect demand negatively," he said.

"Higher taxes on mobile phones and smartphones in the past have also resulted in higher incidences of duty evasion by unethical market participants, and have led to legitimate revenue loss for the government. It also increases the chances of export of stocks meant for local markets due to higher import duty credit available to traders. This again results in revenue loss for the government due to GST redemption provided to the exporters," he added.

Upasana Joshi, Associate Research Manager, Client Devices, IDC India said that smartphones, especially the budget phones, could get more expensive in India. A higher price may discourage new buyers and even existing ones from getting a new handset or upgrading.

"Eighty percent market lies below US$200, the majority impact will be seen here as devices might get costlier. The barrier in shift owing to ASP between a feature phone (which still accounts for 40% of India's mobile phone market) and entry level smartphone will widen, thus restricting this huge base of feature phone users to migrate to a newer smartphone," she said.

"Mid-range segment ($200-500) to get stuck as upward movement from US$200 (upgraders) might be slower and flagships (US$500+) will further become unaffordable," she added.

Joshi said that owing to heavy dependency on China supplies, for import of components and parts (for local manufacturing here) has already started to face heat owing to the breakout of coronavirus. The supply constraints starting from end Q1'20 up till mid Q2'20 is expected to slow down the growth momentum for CY2020.

Indian smartphone company Lava International hinted that the GST hike could affect the government's Make in India program where it encourages local and international players to manufacture devices and components locally.

"This is an erroneous move to hike GST on mobile phones, especially at a time when the world is fighting a Pandemic. This move will adversely affect the buyers, industry, economy as well as the momentum of Make In India program. We are working with the Government and are hopeful that the right decision will be made for the industry," said Sunil Raina, President & Business Head, Lava International.