VAT refund cut will boost grey market, say traders

  • mobile phone industry
- Prahlad Rijal, Kathmandu

Jun 8, 2016-

Mobile phone importers said that the cut in VAT refunds announced through the new budget would push up prices and encourage consumers to buy cheaper sets from the grey market.

Importers get a partial refund of the VAT (value added tax) paid for imported cell phones, and the government’s financial plan for the fiscal year 2016-17 has slashed the rebate from 50 to 40 percent.

Speaking at a roundtable discussion organised by the Kantipur Media Group on Monday, traders said that the move would motivate customers to switch to lesser priced mobiles that come through the grey market.

“The cut in VAT refunds will put upward pressure on prices as it will force us to revise our price lists,” said Sanjay Agrawal, CEO of TeleTalk, the authorised dealer of Gionee mobiles in Nepal. The company also sells a local mobile brand Colors. 

“The investment is high in the dynamic mobile business environment, and the government should focus on promoting healthy competition.”

Providing VAT refunds for mobile phone imports has sparked controversy amid recent reports of gross violations of the facility. The revelations prompted the government to slash the tax refund through the budget for the nest fiscal year, the third such reduction in as many years.

According to the Office of the Auditor General (OAG), importers of mobile phones received more VAT refunds than they paid to the government by misusing the Financial Act’s provision. The government had introduced the policy of VAT waiver to control under-invoicing.

As per the Financial Act, importers receive a 60 percent VAT refund if the imported phones are sold to VAT-registered firms. Traders receive a 100 percent refund if the handsets are re-exported. The OAG in its 53rd Annual Report stated that gross violations of the provision resulted in the government returning Rs134 million to importers of mobile devices who had originally paid only Rs84.4 million in VAT.  

Meanwhile, stakeholders said the government should monitor the market more strictly to avoid grey transactions and impose a fixed rate on imports while scrapping the current provisions that negatively affect the legitimate market.

“The market monitoring system is not effective. Moreover, there is lack of homework and coordination between telecommunication agencies on implementing IMEI registration,” said Pawan Bhimseria, managing director of Genxt, the authorised distributor of iPhone in Nepal.

The IMEI (International Mobile Equipment Identity) code uniquely identifies mobile phone sets. “The IMEI policy might provide information, but it is difficult to curb the grey market without improving market monitoring at major trading hubs and customs points.” 

The Nepal Telecommunications Authority (NTA) allayed traders’ concerns saying that the hassles faced by them were due to technical difficulties in implementing a new system.

However, after its full implementation, the new rules regarding mandatory registration of unique identifier codes of mobile phones will curb the grey market and prevent under-invoicing, the NTA said. 

“Some complications have surfaced because major telecom operators asked for a grace period to build a database system for registration. After full implementation of the system, unregistered phones will be blocked, forcing mobile phone users to comply with the new rules,” said Purushottam Khanal, director of the NTA. 

“There are no loopholes in the IMEI registration guidelines. The only issue is lack of manpower to speed up the process, and NTA has been mulling hiring additional technical engineers.”

Meanwhile, mobile importers have expressed concern over delays in clearing shipments through customs as it takes time to record the IMEI numbers of every incoming handset. “We are spending several weeks to clear our shipments through customs,” said Agrawal of TeleTalk.

Manish Raj Bhandari, managing director of Allied Trade Link, the authorized distributor of Karbonn mobiles, asked the NTA to set up offices at customs points to speed up the process instead of compounding the hassles being faced by traders operating in a tough competitive environment. “Such provisions and complications make our investments unsafe,” he said. 

However, the NTA said that traders should step up efforts to digitise communications. “The data comes late, and we have to update it manually,” said Khanal. “Traders should ensure rapid information flow and follow the guidelines proactively.”

According to Khanal, coordination between traders and the NTA should be strengthened to implement the system more effectively.

The main objective of the mandatory IMEI registration rule is to curb the grey market and ensure customs revenue collection. The rule requires authorities to maintain a database of all the mobile phones being imported and in use throughout the country.

Published: 08-06-2016 08:34

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