A sigh of relief for GPRS mobiles!

NEW DELHI: The Central Board of Excise and Customs (CBEC) has gone back on a move to classify GPRS phones as radio navigational apparatus (better known as satellite phones) for tax purposes. This means GPRS-enabled phones will face a 4% Customs duty rather than the 34% applicable on satellite phones.

The move comes as a major relief to mobile phone and PDA manufacturers like Nokia, Samsung, Blackberry, Motorola, PalmOne, O2, i-mate and HP. GPRS phones also allow interact access and generally carry features such as web-camera and MP3. These include widely-used models such as the Nokia N series, Samsung Ultra series, LG C series and Motorola’s Ming and ROKR phones and are usually priced above Rs 10,000.

In January 2007, a circular from the Office of the Commissioner Customs classified HP’s iPAQ 6515 GPRS phone as a GPS receiver, subjecting it to a Customs duty of 34% instead of 4% levied on mobile phones.

The circular caused widespread panic in the industry, which feared prices of GPRS phones would go up by 25% if the same principle is applied to other similar models.

As a result, mobile phone makers started using disclaimers. For instance, the new Nokia N95 ad shows a disclaimer saying, “It’s a cellular phone with additional features of internet, camera, video, wi-fi and music.” The mobile handset market in India is estimated at over Rs 30,000 crore at present, with high-end (GPRS, MP3, camera) phones accounting for nearly 40% of the market.

However, on April 19, the under-secretary, Customs policy, in CBEC issued a clarification rescinding the January circular. “An apparatus will be classified as a mobile phone rather than an ADP machine or camera or GPS receiver when its principal function is telephony. For transmission of signals, it should use the bandwidth allotted to cellular/mobile networks.

It should comprise a transceiver, antenna, subscriber identity module (SIM), IMEI (International Mobile Equipment Identity) or other unique identity for cellular/mobile phones as well as software such as GSM, GPRS and EDGE etc,” the clarification said. Despite the presence of many advanced features, many users of GPRS phones use them mainly for basic functions such as voice calls and text messages.

Industry players had also feared, following the January circular, that phones with MP3 features would now be classified as MP3 players, which carry a duty of 18.6% while PDA phones could be classified as ADPs (i.e. computers) that carry a 16% duty instead of the 4% levied on mobile phones. These apprehensions were, however, not made public as it would have led to chaos.

After the January circular, GPRS-enabled phones with GPS (global positioning system), MP3 and PDA features were being compared with GPS, MP3 players and computers (as they carry higher duty) by tax officials though no formal order had been issued in this regard. There was also confusion among taxmen over classification of PDAs, camera phones and GPS receivers with respect to the duty bracket. Many grey marketers had already started selling Nokia N95 phones at Rs 45,000 (factoring in the additional duty) compared to the market price of Rs 35,000.

In the HP iPAQ case, the now withdrawn January circular noted that since the equipment had “three principal functions of phone, GPS receiver and PC, it was thus classifiable under CTH (custom tariff heading) 8526 as a GPS receiver (satellite phones)”.

GPS receivers having a phone function that doesn’t communicate through cellular/mobile networks but satellite connection or differential GPS (on longwave radio frequencies) are now, following the April clarification, classifiable as radio navigational aid apparatus. HP iPAQ used normal cellular networks.

The industry is seeing the new circular as a hugely important one that will have widespread ramifications since mobile phones come with newer features every six months. Field formations were facing difficulty in classifying a product having a combination of characteristics due to absence of any guidelines.

Pankaj Mohindroo, chairman of the Indian Cellular Association (ICA), said: “Other developing countries may also use the Indian judgment as a reference for taxation. The judgment will prevent the grey market from raising its ugly head again.” ICA spearheaded the representations to the government.

Industry players like Nokia are also jubilant. “Water finds its own way. Prices of high-end sets would have gone up by 20-25% if the circular wasn’t have been reversed. The grey market sellers would have imported handsets from other countries where Nokia would launch its products. It’s a very forward-looking judgment,” Nokia director-multimedia phones Vineet Taneja told ET.