The Union government’s budgetary proposal to hike excise duty on mobile phones costing more than Rs. 2,000 from the current rate of 1 per cent to 6 per cent has drawn sharp reactions from mobile handset manufacturers.

The move, which ostensibly protects the low-end feature phone segment with handsets typically costing between Rs. 1,000 and Rs. 2,500, will impact smartphone sales, say manufacturers.

Most manufacturers have said that they would be forced to pass on the burden to consumers.

In a market where phones compete neck and neck at various price points, particularly in the low-cost smartphone segment, the move will force cellphone makers to tweak their price tags as judiciously as possible, say analysts.

The logic of Finance Minister P. Chidambaram’s move rests on his contention, made in his budget speech, that 70 per cent of imported mobile phones and about 60 per cent of those manufactured domestically are priced at Rs. 2,000 and less. His implicit argument seems to be that a hike in taxes will not impact cellphone adoption in the country.

However, handset makers question the government’s assumptions.

Deepak Mehrotra, CEO of Micromax Informatics, told The Hindu that an industry consultancy estimates that only around one-third of the handsets sold in India cost less than Rs. 2,000 per unit.

Micromax, which along with Karbonn Mobiles, has some of the most affordable phones in the market, has less than 20 per cent of its sales volumes from products priced below an MRP of Rs. 2,000, Mr. Mehrotra said.

‘Data services will be affected’

Industry reactions have also been that the move may adversely impact the uptake of data services. The announcement comes at a time when telecom service providers have just launched drives to push adoption of 3G services and tweaked data plans to make this work, a telecom industry source said. The positive growth in smartphone adoption in the country in 2012, has led many operators to push data plans, the source said, adding that this would “impact consumer sentiment”. Mr. Mehrotra said that given that the telecom sector was banking highly on the consumption of data and the usage of mobile Internet, this announcement would have an adverse impact. The homegrown mobile device maker, which has over the years played a significant role in making cellphones and smart devices more affordable, will also hike prices shortly, Mr. Mehrotra said. “If at all there is an increase in rate, it should have been for phones of over Rs. 5,000. Though, ideally keeping customs duty as it is would have helped the telecom industry to drive adoption for more consumption of data and the usage of mobile Internet,” he said.

‘No positive impact’

In a statement released post-budget, the South Korean electronics major Samsung, which leads the Indian smartphone market, said that the impact of the increase would not be positive. Company representatives reportedly said they were in the process of working out the new points.

Though it’s “not a welcome move”, the duty hike will not have a huge impact on the sector, says analyst and director at Zinnov Consulting, Praveen Bhadada. “The focus should have been to enable the mobile economy. This may not dent the market, given mobile phones have now become a utility, but it will have an effect from the consumer sentiment perspective.”

Additional revenue

It is estimated that the move will enable the government to get additional revenues of between Rs. 1,800 crore and Rs. 2,700 crore, depending on the cost of production of the handsets. It is evident that the move will hinder the entry of new handset makers into the industry, which may well bring about a consolidation in the industry, implying that prices may remain firm.