The manner in which tax is levied may sometimes not only deny the imposer significant revenues but also reduce the existing kitty. This is what seems to have happened in the case of Maharashtra where the government has raised the value added tax (VAT) from 4 per cent to 12.5 per cent on mobile phones from July 1. According to estimates prepared by Nokia this will shrink the governments revenue from Rs 168 crore now to Rs 33.5 crore by the year end.
Market size is also expected to fall as trade will get diverted to neighbouring states,say experts. According to estimates,the regressive move on the part of the Maharashtra government will cause shrinkage in the market size of mobile handsets from Rs 4,200 crore at present to Rs 268 crore by the end of this fiscal.
Mobile handsets are classified as information technology products,which usually do not attract such high rate of taxation. This is because India needs to improve its telephone density in order to improve its ranking according to world development indicators. If at all such a move has to be made,it should be done in co-ordinated effort with other states so that cross border purchases dont go up, says PriceWaterhouse Coopers executive director R Muralidharan.
In fact,with the Maharashtra governments decision coming into force,the prices of mobile phones would go up from anything between Rs 127 for the lowest segment to Rs 2,550 for high segments,according to industry analysis. This is likely to give a fillip to the grey market according to both industry and indirect tax experts.
The common man usually starts with a sub-entry level phone of Rs 1,500. In the new dispensation of 12.5 per cent VAT,he has to pay Rs 127 extra on account of the 8.5 per cent VAT hike. Normally,the man on the street will shift to the grey market to save Rs 187 on VAT. Our experience shows that Rs 30 is the point at which the consumer turns away from the official market to the grey market. He is not ready to pay a tax higher than 4 per cent on a mobile phone, says a telecom hardware industry analysis prepared by Nokia.