The Indian Goods and Services Tax Council’s recommendation to increase the tax rate for mobile phones will force manufacturers to increase prices despite low demand, further hurting businesses during a difficult time, a practitioner said.
The GST Council, chaired by Finance Minister Nirmala Sitharaman, on March 14 recommended that the government increase the GST rate for mobile phones and specified parts from 12 percent to 18 percent. The increased rates will take effect on April 1. The council also announced that it will delay the deadline to comply with e-invoicing rules to October 1.
The government likely increased the rate to resolve the issue of the inverted duty structure in which the GST rate on inputs received is higher than the GST rate on output, Ritesh Kanodia, a partner at Dhruva Advisors LLP, told Tax Notes. Kanodia said GST revenue pressure also could have factored into the decision to increase the rate. The GST regime has been criticized for a perceived lackluster increase in tax revenues since its implementation in 2017.
In a March 17 letter sent to company executives, the All India Mobile Retailers Association said that “a further loss of 6 percent due to the GST hike is unbearable” and called on businesses to safeguard mobile retailers from the increase. “Even though our expenses and overheads are intact, [mobile phone] sales have come down by 70 percent” because of the impact of the coronavirus, the association said.
Manu Kumar Jain, managing director at Xiaomi India, said in a March 14 tweet to Sitharaman and Prime Minister Narendra Modi that the industry is already struggling with a depreciating rupee and supply chain disruption because of the pandemic.
The GST rate increase for mobile phones “will crumble the industry,” Jain tweeted. He proposed that the government consider applying the increased rate only to devices over $200.
Kanodia also suggested that the 18 percent GST could be applied only to mobile phones above a specified retail price. “Though the move is to rationalize the tax structure, the industry believes that the issue could have been resolved by reducing the tax rates on inputs,” he said.
In this economic climate, the Indian government “should be looking outward to increase their footprint worldwide, instead of increasing the tax burden for the domestic industry,” Kanodia said. He said India should follow the lead of the many countries that have already announced measures to support businesses and mitigate the effects of the coronavirus.