CORPORATE TAX REDUCTION: SHOT IN THE ARM FOR INDIAN SMARTPHONE INDUSTRY

The recent announcement by the Union Finance Minister, Niramala Sitaraman slashing the corporate tax, among many other segments, the smartphone market is upbeat about it. As per the smartphone manufacturers, the slash in tax means the leading players could eventually increase the overheads in addition to pump in more money for the homegrown Research and Development. In addition to the smartphone manufacturers, the tax reduction is also helping the producers of components such as lithium batteries, camera modules as well as phone display, to say the least.

Recently, the Union Government, in its effort to give impetus to the sagging growth rate of the economy, had announced a reduction of tax rate to 22% from 30%. This is certainly a strategic move by the Government of India, to ward off criticism from the Opposition parties besides rejuvenating investment in the third biggest economy in Asia.

India has already upped its ante in terms of attracting investments by wooing big players including Apple to set up shop in the country. With intense competition from Asian nations including Vietnam, India is taking concerted effort to rope in big names in the smartphone segment. Besides that, India is also leaving no stone unturned as it has approached the contract manufactures in the likes of Wistron and Foxconn to establish manufacturing units in the country.

China-US Trade war

As there is ongoing conflict between the neighbouring country China and the US, the smartphone makers based out of these countries are a worried lot. Subsequent to the standoff, these players were rather forced to look for safer zones to push their business. So, precisely, it is in this juncture, India’s announcement of tax reduction makes perfect sense and relevance as well, as the country is inviting all these players to come and set up shop in the vast horizon spanning Kashmir to Kanyakumari.

No wonder then, the India Head of Chinese smartphone maker, OnePlus, Vikas Agarwal had told news agency Reuters that it was a clear signal from the Government of India in terms of encouraging investor’s confidence in the Indian economy. The Chinese smartphone manufacturer makes devices in the domestic arena and takes on the might of global brands such as Apple to grab a proportionate share of the country’s high-end smartphone segment. Agarwal also told the agency that besides impacting the profitability of the firm, it would also support in terms of increasing the sales, at the same, realising the ambitions of the country.

Thanks to the tussle between the Land of Dragons and Uncle Sam, triggering the escalation of tariffs on many goods worth billions of dollars, this has in turn impacted the international distribution. Thus, due to the disruptions, the smartphone manufacturers had to lose profit margins and few firms even facing big losses as well. Hence, the manufacturers of gadgets and gizmos including smartphone makers started to look for new horizons in order to get out of the rising tariffs.

Employment potential

As India is already facing severe job losses in the industries such as automotive and allied fronts, thanks to the ongoing slowing down of economy, the Government of the day is desperate about doing something about opening newer frontiers in terms of employment generation. As part of its efforts, India is certainly having cohesive focus on wooing the electronic majors to come and invest in India so that it might as well generate more job opportunities. The rollback of the tax was just the right move, more particularly, opening up the labour-intensive electronics manufacturing segment, where lot of employment opportunities could be generated, should the firms set up shop. Of great significance in the tax reduction includes the slashing of tax on imports of open cell television panels, which are quintessential in terms of the production of television displays. Apparently, the new move from the Government is all set to rejuvenate the sagging television production sphere as well.

Why Invest in India?

With the foray of top brands, India has now become second largest mobile phone market in the world. What is more, the initiative of ‘Make in India’, kick-started by the Government has laid lot of emphasis on the smartphone segment. There is also tax reduction for any multi-national company, which sets up shop on or after October 1, 2019 and the plant going on stream by March 2023 is pretty much rock-bottom rate of 17%, way less than the competing nations. The ultimate aim is to woo the contract manufacturers such as Pegatron of Taiwan, involved in the production of niche electronic components, which do not have its footprint in India.

Many of the smartphone makers have agreed that the tax slash would eventually help these firms to provide more jobs in addition to pump in more money in local R&D. The Chinese smartphone manufacturers Xiaomi and Indian firm, Lava had already told the media the tax reduction had helped them to add more overheads in addition to earmark more funds in the realms of R&D.

The move will also help firms like Xiaomi, which is the largest smartphone manufacturer in India to rope in more component vendors from China to India to set up units near its manufacturing plant. For, this will not only help the Indian production segment in a big way but also increase the localisation, thus bringing down the prices of the smartphones further.

Already, a lion’s share of its component needs is met through local contract manufacturers. After bringing more vendors to set up shop near its facility, it will be a win-win situation for both Xiaomi as well as India. A case in point is the roping in of its supplier, the manufacturer of camera modules, Holitech to establish a production facility in north India.

In addition to that, the tax sops will also attract allied makers of components such as lithium cell manufacturers, camera modules makers, mobile phone display panels manufacturers and more. Furthermore, the tax reduction also means helping India scale up a couple of notches ahead in terms of getting into the upward tick in the global index that rank nations by ease of doing business.

It may be recalled that the corporate tax of India was on par with the highest in the world. After bringing down the corporate tax, India would be at par with top notch manufacturing economies in the likes of the US and the neighbouring China, according to industry grapevines. Added to that, if the Reserve Bank of India, the Central Bank of the nation help in propelling the growth, by further slashing the lending rates by 75-200 basis points, there is no rhyme or reason as to why the growth not to take off at the right earnest.

When it comes to standalone benefits of each firm, it would be a cumbersome process to assess the benefits, nevertheless, the new corporate tax structure is bound to improve the profit margins in a humongous way. For instance, the smartphone majors like Apple and OnePlus, who are into the production and sales of high-end expensive devices.

Impediments

Make in India, tax cuts, RBI lending rate reduction and all these initiatives are positive indeed. It looks optimistic at the outset that the smartphone industry is showing all signs of logging exponential growth. But, to bring in more manufacturers into the country, there are certain initiatives to be taken, moving away from comfort zone including making single-window clearance for Government related procedures including acquisition of requisite land, water and power. In addition to that, last might connectivity should also be improved to the already booming infrastructural developments that is taking place pan India. Overall, the scenario looks positive. If the RBI too acted in tandem with other initiatives in terms of reducing the lending rates, going forward, India might as well be one of the top players dominating this industry.

– Jayashankar Menon

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