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As much as Rs 8,000 crore worth of mobile phones in this segment - out of a total of Rs 15,000 crore - come into the country through the grey market.
The government imposed the duty on these phones primarily to encourage domestic production but the strategy has failed as the bulk of high end mobile phones are currently imported.
The exchequer is taking a hit of Rs 2,400 crore per annum by losing over half the value of mobile phones which are sold at more than Rs 50,000 a piece because they are being smuggled into the country.
The market for phones of this price is dominated by Apple, Samsung, and some models of Google Pixel.
According to the data submitted to the Central Board of Indirect Taxes and Customs (CBIC) by the Indian Cellular and Electronic Association which represents the mobile device players, as much as Rs 8,000 crore worth of mobile phones in this segment - out of a total of Rs 15,000 crore - come into the country through the grey market.
As for phones costing more than Rs 50,000, this segment constitutes a reasonable 7.2 per cent of the value of handsets sold in India.
As a result of this rampant smuggling, the government loses Rs 2,400 crore annually, which includes losses due to non-payment of 12 per cent GST as well as the 20 per cent basic Customs duty.
The government imposed the duty on these phones primarily to encourage domestic production but the strategy has failed as the bulk of high end mobile phones are currently imported.
Owing to the high taxation, there is a huge arbitrage opportunity between the price of a phone which is imported legitimately into the country and that which comes through the grey market from Dubai, Hong Kong, and the US which offer zero tax trading.
The Association points out in its letter to the CBIC that a Rs 1 lakh phone in India, with all taxes paid, is available in these foreign markets at a price which is lower by Rs 25,000 to Rs 30,000 per phone, encouraging grey market operations.
In simple terms, since such phones do not pay basic custom duty or GST, they can be sold at around two thirds of the price of a legitimate phone.
Unlike other consumer electronic items such as televisions, phones are small and easy to smuggle in, especially as there are 10-14 flights daily between India and Dubai and India and the US, even though the price of the phones is higher than the permitted baggage allowance.
Mobile device manufacturers who operate in this category have said that the 20 per cent basic custom duty will not encourage them to start manufacturing these phones in India at all, or shift their production bases from China, Vietnam, and Taiwan to India.
The Association has advised the tax authorities that while the basic custom duty should be continued at 20 per cent, the maximum duty should be pegged at Rs 4,000 per phone beyond CNF (cost net freight) price of Rs 20,000 a device.
This would effectively mean that a phone costing Rs 50,000 would be liable to only eight per cent duty.
The Association concedes that this plan would lead to a Rs 700 crore loss of revenue from basic custom duty but points out that the GST collection will more than make up for this by going up by at least Rs 1,000 crore.
Image used for representation purpose only.
