The government should not reduce import charges on electronic components used in smartphone manufacture in the next Budget since the present tariff system has proven successful and altering it might affect local manufacturing, according to a GTRI report released on Monday.
The Global Trade Research Initiative (GTRI) stated that keeping existing rates will assist in balancing industry growth and long-term development in India’s expanding smartphone market.
“Currently, tariffs on imported parts for smartphones in India are between 7.5 per cent and 10 per cent. The Budget should maintain these taxes. The Budget should not cut the import tariffs on parts used to make smartphones,” it said, adding that the current rate of levies supports duty-free imports for making products to exports.
The suggestion is in contrast to the demand of the industry association India Cellular and Electronics Association (ICEA), which claims that lowering import duties on mobile phone components may enhance local handset production by 28 per cent to USD 82 billion, improve exports and encourage indigenous manufacturing.
The think tank stated that Indian manufacturers “must pay” duties on cellphones sold in India, but that exports should be free from such levies.
“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,” GTRI Co-Founder Ajay Srivastava said.
According to the GTRI research, India’s smartphone industry, with exports increasing from USD 7.2 billion in 2022 to USD 13.9 billion in 2023, is the top performer for the PLI (production linked incentive) plan by a large margin, with over 98 per cent of smartphones sold in India is manufactured locally.
This shows the effectiveness of deft policy interventions such as PLI incentives, which provide a 4-6 per cent financial incentive for yearly incremental manufacturing while keeping a differential in tariffs for cellphones and their 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,” he said.
According to Srivastava, reducing tariffs may increase to superficial assembly plants that rely on imported parts and contribute less to the local 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 added.
The rising import bill of electronic components from USD 24.4 billion to USD 30.7 billion, a 25.5 per cent increase, suggests a high use of imported components in local manufacturing, according to the GTRI, adding that value addition is expected to increase over time as more components are manufactured 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,” it added.
According to the report, between 2015 and 2017, numerous companies began building cellphones using imported SKD (Semi Knocked-Down) kits, and tax arbitrage made this possible.
“To promote manufacturing, the government announced a differential tax policy. Import of components to manufacture phones attracted only one per cent countervailing duty. But importing for sale attracted a 12.5 per cent duty. The arbitrage disappeared with the introduction of GST(Goods and Services Tax) in July 2017. All such firms disappeared simultaneously,” the report said.
It added that maintaining the current import tariffs is crucial for sustaining the growth and depth of India’s 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,” it said.
