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With customs duty cut, scrapping of SAD — `Mobile handset prices likely to drop 8-10 pc'

G. Rambabu

New Delhi , Jan. 8

THE telecom sector, in particular, cellular services, is expected to benefit immensely from the overnight changes in customs duties and abolition of Special Additional Duty (SAD) announced by the Finance Ministry.

According to industry sources, while mobile handset prices are expected to drop sharply, the operators are also likely to benefit from the exemption in customs duty granted to specific infrastructure equipment, which will enable them to cut down their costs and ensure a speedier rollout/up-gradation of services. Here again, the end-customer could benefit by way of reduction in tariffs, if that saving on cost is passed on by the service providers.

To start with, mobile handsets' (both GSM and CDMA) prices are expected to drop by 8-10 per cent in the next couple of weeks following the reduction in customs duty to 5 per cent from the existing 10 per cent and also abolition of 4 per cent SAD. At present, the basic models of GSM handsets are available for between Rs 3,500 and Rs 4,000, which will correspondingly go down. The price drop (in terms of absolute numbers) will, however, be greater on the costlier handsets that are GPRS-enabled and allow for multi-media messaging along with camera-phones.

As for the CDMA phones, which continue to be priced higher than GSM phones, a drop in prices will attract the "fence-sitters" who were being deterred by the handset price.

A much greater boost could, however, be provided if the sales tax imposed by State Governments is also reduced. Although the sales tax in many States is only 4 per cent, quite a few States continue to impose a high rate of 12-20 per cent on mobile handsets. While it is 12 per cent in some States such as Kerala, Bihar, Assam and 20 per cent in Tamil Nadu, an additional octroi is levied in Gujarat, Punjab and Maharashtra.

According to Mr Pankaj Mohindroo, National President, Indian Cellular Association, the apex body representing all the handset vendors (including Nokia, Motorola, Samsung, Siemens and Alcatel to name a few), this will also lead to a drastic reduction in the grey market, which at present is almost 50 per cent of the overall mobile market. If the customs duties are further reduced in keeping with the WTO commitment, the grey market share could come down to five per cent.

"All the handset vendors have committed to lowering the prices if the customs duty is reduced and this will become evident in the next couple of weeks," he told Business Line.

As regards the operators themselves, the reduction in duties on infrastructure equipment will enable them to roll out their services even more effectively. As it is, the telecom equipment prices have been falling over the past couple of years, and operators have been able to save on costs in setting up a nationwide network.

The announcement that "specified infrastructure equipment for basic/cellular/Internet, V-SAT, radio paging and public mobile radio trunked services and parts of such equipment are being exempted from basic customs duty", will benefit the entire sector immensely. This will also have a direct impact on the price of these services, as the operators will be able to pass on the benefit of lower costs by way of lower tariffs.

Another significant measure that has been announced is the reduction in customs duty on specified raw materials/inputs used for manufacture of optical fibres/cables. This will drive down the cost of optical fibres/cables, which can be passed on to the telecom operators allowing them to bring down their cost of wiring up the country. Once again, the customer of the services could be the beneficiary in the long run.

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