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Treat local phone as deemed export

The Prime Minister’s Office is reportedly considering raising the import duty on mobile phones to shield local phone makers in the goods and services tax (GST) regime.
This would violate India’s commitment to waive import duty on IT products. 

 The best way to encourage genuine Indian manufacture of high-value electronics is to refund a multiple, a tad higher than one, of the GST paid by the local phone maker, not raise tariff walls.
Imported phones now attract a 12.5% countervailing duty, supposedly to offset the excise duty, but the actual excise duty levied is just 1% if the vendor claims no credit on the central value-added tax.

 This effectively offers alocal entrepreneur who imports the phone components protection of 11.5%.

 The department of telecom has apparently proposed levying a basic customs duty — a levy that will not be subsumed under GST — on imported phones to protect domestic phone makers.

 The tax arbitrage will vanish with GST, as countervailing duties will be subsumed in the new tax system.
This is a sub optional solution. Duties on components will also have to be raised to drive local value. But that would mean a violation of the Information Technology Agreement of 1997.
This could also adversely affect exports from India to other countries as the latter could raise duties in retaliation. This is wholly avoidable.
When the import duty on a product is zero, its local sale by a domestic manufacturer is effectively sale outside the domestic tariff area.
It should be considered a deemed export. Countries do not export local taxes charged on their products.
Which means that the GST paid by a local phone maker should be reimbursed to him, for his product to compete on an even keel with imports, which bear no element of manufacturing tax in their home country.
It will encourage them to add value in India. The GST chain will also remain unbroken, making production efficient and rendering exports from India competitive. Surely, the government can refund the local producer of a zero-tariff good 1.05 times the GST paid on manufacturing value-added.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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