The Hindu : Front Page : Tax flaws to the advantage of mobile sellers

Online edition of India's National Newspaper
Saturday, Sep 17, 2005

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Front Page

Tax flaws to the advantage of mobile sellers

V.S. Palaniappan

Low-end models in Tamil Nadu are costlier by Rs. 160 and high-end by Rs. 2,400 In total, the tax suffered in Tamil Nadu is 9.7 per cent as against just four per cent in other States.

COIMBATORE: The mobile phone subscriber base in Tamil Nadu is growing at a rate of slightly over 30 per cent a year is a good news. The bad news is that the growth of handset market has stagnated at just over five per cent.

This is due to the influx of handsets from the neighbouring States because of the low taxation slab there. With Tamil Nadu staying out of implementing Value Added Tax (VAT), the handsets sold in Tamil Nadu suffer tax at the rate of nine per cent on an average. But those sold in the neighbouring States such as Karnataka, Kerala and Andhra Pradesh are suffering only four per cent tax, market sources say.

Handsets entering Tamil Nadu suffer an Entry Sales Tax of 4.2 per cent besides 2.5 per cent on the turnover. In addition, when the national distributor sold the handsets to the local distributor they suffer one per cent resale tax and another one per cent when the distributor sells it to the dealer. Ultimately, when the handsets reached the consumer they suffer one more per cent as resale tax. In total, the tax suffered in Tamil Nadu is 9.7 per cent as against just four per cent in other States.

Interestingly, these States accounted for sale of more handsets than the total net new addition to the subscriber base (i.e., the number of new connections sold) of every cellular operator, whereas the sale of handsets was only 50 to 55 per cent of the net addition to the subscriber base in Tamil Nadu.

Thriving market

As a result, the low-end models in Tamil Nadu are costlier by Rs. 160 and the high-end models by Rs. 2,400 on an average. The other States have one-end taxation policy and Tamil Nadu a multi-point taxation in the absence of VAT. As a result, a section of the market continues to thrive on "smuggled" handsets by buying it from the neighbouring States and by selling it in Tamil Nadu without bills.

Owing to such unaccounted sale of smuggled cellphone handsets, Tamil Nadu exchequer is estimated to be losing close to Rs. 3 crores a year. Northern Tamil Nadu is getting handsets from Andhra Pradesh while the Western, Central and Southern Tamil Nadu are getting it from Kerala and Karnataka. The mobile handset market is broadly classified into two — handsets with bills and those without bills. The handset without bills will not be covered by any warranty. In a market where cell phones are changed or upgraded in just two to three years, only a miniscule section is worried about buying with bills and warranty. While traders bound by ethical practices continue to suffer a loss of market share, the unaccounted sale market thrives on smuggled handsets.

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