Union Budget 2017: Multi-tier tax slab can make smartphones cheaper

While India is still 65% a feature phone country, it should be the endeavour of the government to catalyse smartphone adoption that will ultimately achieve the real digitalisation goal. The industry has been recently responding by creating solutions for the feature phone segment as well, only to magnify the impact and reach of digital economy. But that is only a tactical way of expanding the base. The long term solution is that we have more smartphone users.

While India is still 65% a feature phone country, it should be the endeavour of the government to catalyse smartphone adoption that will ultimately achieve the real digitalisation goal. The industry has been recently responding by creating solutions for the feature phone segment as well, only to magnify the impact and reach of digital economy. But that is only a tactical way of expanding the base. The long term solution is that we have more smartphone users.

As the Budget is just around, industries across sectors are expecting this to be an enabling budget which will only facilitate in leveraging from the economic reforms initiated over a period of time. Mobile handset industry is no different in expecting the best to come in the budget giving a fillip to the industry and supporting it to take forward the 'Cashless Economy' initiative. A mobile phone has all the capability to become the central point in the Cashless Digital Economy and it needs to be treated as a Meta resource for the same.

While India is still 65% a feature phone country, it should be the endeavour of the government to catalyse smartphone adoption that will ultimately achieve the real digitalisation goal. The industry has been recently responding by creating solutions for the feature phone segment as well, only to magnify the impact and reach of digital economy. But that is only a tactical way of expanding the base. The long term solution is that we have more smartphone users.

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Price of a smartphone is among the top inhibitors for mass penetration. A recent buying behaviour study commissioned by CMR has ranked price as the first factor evaluated while selecting a smartphone. So any change in the price has a greater than expected bearing on the sales.

To facilitate the Digital Cashless Economy go next levels, I have only one expectation from the upcoming Budget. The government should introduce a multi-tier tax slab structure for the smartphones. For the up to ₹10,000 smartphones, there should be zero tax rate announced as this segment - Affordable smartphones segment, caters to the first time smartphone users. Though this will have huge impact on the tax revenues Government generates from Smartphones as around 69% of the smartphone sales are within Affordable range of smartphones, but to take the Digital Cashless Economy forward, penetration of smartphones needs an impetus. And for that smartphones up to ₹10,000 need to be pushed as new smartphone users buy phones under this price threshold.

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I understand Government might not go for zero tax for the entire under ₹10,000 smartphones. There could even be two slabs of less than ₹5 or 6,000 and the next up to ₹10,000. To begin with they could go with zero tax for up to ₹6,000 smartphones which would be 40% of the smartphone sales and reduce by half for the ₹6-10,000 bracket.

This not only will give impetus to the adoption of smartphones in the country paving way to widening of Digital Economy, but also facilitate comeback of Indian brands in the smartphone space. Barring Lenovo and Xiaomi, all other rapidly growing Chinese smartphones target above ₹10,000 market, which predominantly comprises of upgrades and replacements. If government treats sub ₹10,000 market differentially through an attractive tax structure, the demand would increase in this Affordable segment, primarily benefiting the Indian brands. We have all seen that over a period of two years, things have gone reverse for the Indian brands in smartphones. While towards the end of 2014, Indian brands were 41% of smartphones, they have shrunk to 24% towards the end of 2016.

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CMR segments the smartphone market in to above four categories based on price brackets catering to different Socio Economic as well as Demographic profiles of smartphone users. I would expect that the budget for 2017 recognizes the different dynamics of market in each of these established segments and adopts a differential tax approach to each of these market segments. This, while balancing the revenues government realizes from the sales of smartphones also gives impetus to the market growth by bringing more and more users on to this Smart device contributing significantly to the Digital Economy efforts roped in by Government from various corners.

The decision would definitely not be an easy one to take. But, it has to be another radical decision that this government should take going well with their precedence of taking bold initiatives for the better in the long horizons despite some upfront pinch.

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I am sure industry, especially the domestic breed of brands will not only welcome and appreciate this step, but will also find reasons of rejuvenating the smartphone market at the lowest strata of the market where they have a dominant play. This will also not flout any international free trade practices and allow the domestic brands to re-grow to facilitate the next jump in their stature.

(Faisal leads the Industry Intelligence Practice at CyberMedia Research (CMR) and is based out of Gurgaon (near New Delhi). In this role he drives all market intelligence function and is responsible for the standard research offerings in the domains of Telecom, ESDM and IT)