Govt Should Maintain Current Import Duties On Components Used In Making Smartphones In Budget: GTRI

The global think tank stated that maintaining the existing rates would help balance industry growth and long-term development in the country’s smartphone industry

The government should not reduce import duties on electronic components used in manufacturing smartphones in the upcoming Budget, a GTRI report said on Monday. The report noted that revising the existing tariff structure could harm domestic manufacturers. 

The global think tank stated that maintaining the existing rates would help ‘balance industry growth and long-term development’ in the country’s smartphone industry, reported PTI. Notably, the current tariffs on imported parts for smartphones in the country range between 7.5 per cent and 10 per cent. 

The report by the Global Trade Research Initiative (GTRI) said, “The Budget should maintain these taxes. The Budget should not cut the import tariffs on parts used to make smartphones. The current rate of levies supports duty-free imports for making products to exports.” Notably, the government is set to present the Budget on February 1, 2024. 

This recommendation by the think tank presents a stark contrast to the demand of the industry body, India Cellular and Electronics Association (ICEA), that suggested import duty cuts on mobile phone components could enhance domestic production of handsets by 28 per cent to touch $82 billion, increase exports, and help support local manufacturing. 

The global body noted that Indian manufacturers should pay duties on smartphones sold within the country, however, exports should be exempted from these tariffs. GTRI co-founder, Ajay Srivastava, said, “Firms can import necessary inputs or capital goods duty-free for manufacturing and exporting electronic items. This is facilitated through schemes like Advance Authorisation, Export Promotion Capital Goods, and operating in Special Economic Zones (SEZs) or 100 per cent Export Oriented Units. Additionally, firms can use the customs bond scheme for duty-free imports without localisation requirements.”

The report also found that the smartphone industry in the country emerged as the top performer for the production linked incentive scheme by a huge margin. It found that exports increased from $7.2 billion in 2022 to $13.9 billion in 2023, and more than 98 per cent of smartphones sold in India were made domestically. “This shows the success of deft policy interventions that include the PLI incentives that allow 4-6 per cent cash incentive on annual incremental production and retaining a difference in tariffs of smartphones and its components. Big players like Apple, using facilities in SEZs, benefit greatly from this, exporting large volumes without paying import duties on components. Apple collaborates with contract manufacturers Foxconn and Wistron to make smartphones in India. Both Foxconn and Wistron are located in SEZs in India,” Srivastava commented. 

He added that taking away the tariffs could result in an increase in superficial assembly plants that depend on imported parts and add barely to the domestic economy. “Such setups would likely vanish once government incentives end, harming deeper, more sustainable manufacturing efforts in India. Imported components and subassemblies account for bill of material value of an India-made smartphone up to 90 per cent,” he stated. 

Further, the think tank noted that an increase in imports of electronic components from $24.4 billion to $30.7 billion, indicated a boost in usage of imported components in domestic manufacturing. “With time, there is an expectation that value addition will go up as more components are made locally. However, cutting import duties on components will kill any incentive for setting up a deep manufacturing operation in India. Firms will be happy to assemble a mobile phone from nearly ready imported kits. They will pack and go as soon as government incentives disappear,” the report said. 

GTRI stated that several firms began assembling smartphones from imported semi knocked-down (SKD) kits during 2015-17 period. To give a boost to manufacturing, the government launched a differential tax policy, it noted. While the import of components to manufacture phones attracted a 1 per cent duty, importing for sale saw a duty of 12.5 per cent. This difference went away as the Goods and Services Tax (GST) was launched in 2017, and as such, these firms also disappeared, the report noted. 

The think tank maintained that the existing import tariffs are key to sustain the growth of the country’s domestic smartphone manufacturing sector. “Reducing these tariffs could encourage short-term assembly operations over long-term, valuable manufacturing, undermining the industry's success and future potential. The decision to maintain the current import tariffs on smartphone components is more than a fiscal policy; it's a strategic move towards sustainable economic growth,” the report said.