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Calcutta, Sept. 3: The Bengal government has decided to hold back its decision to increase the value-added tax (VAT) on mobile phones to 12.5 per cent from 4 per cent.

“This is great news for the industry. We made a detailed presentation to finance minister Asim Dasgupta today where we highlighted the crippling effect the current decision would have on the mobile phone industry in Bengal,” said Pankaj Mohindroo, president of the Indian Cellular Association.

“We have been told that the ministry has agreed to keep the decision in abeyance for now,” he added.

The new VAT regime was scheduled to come into effect from September 8.

According to industry observers, the increase in VAT would have seriously impacted mobile handset sales in Bengal.

According to the Indian Cellular Association, while the industry hoped to sell 60 lakh units in the state this year, the tax hike could have brought down sales to five lakh units, reducing the size of the organised handset market to a meagre Rs 125 crore from an estimated Rs 1,500 crore.

The entry level segment would have been the worst hit because of the VAT increase.

The new levy would have made mobile phones priced at Rs 1,500 costlier by Rs 127, while handsets priced at Rs 2,000 would have cost Rs 170 more. Handsets priced between Rs 4,300 and Rs 8,300 would have been dearer by Rs 365-705.

According to experts, the move to hike VAT would have led to a resurgence of the grey market with cheaper phones being smuggled from neighbouring countries.

Thus the Bengal government’s bid to raise more revenues by increasing VAT rate could have backfired.

The 4 per cent levy fetched the state government Rs 65 crore in 2007-08, up from Rs 1.5 crore in 2001-02.

The grey market, which comprises 10 per cent of the total mobile market in the state, is shrinking.

An increase in the levy would have allowed the grey market to proliferate, leading to a revenue loss (roughly Rs 172 crore) to the Bengal government.

The increase in VAT would have also had a negative impact on employment opportunities.

“There are about 90,000 to one lakh people employed in in retail and distribution chains in the suburbs and other semi-urban centres. The growth of the grey market would have halved the number to 45,000,” said Mohindroo.

In most Southeast Asian countries, except China, VAT along with customs duty are under 10 per cent.