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Has Demand for Smartphones in India Finally Hit a Wall?

A recent drop in shipments is likely due to a massive tax overhaul

July 31, 2017 | Mobile

Research firm Canalys recently reported that smartphone shipments in India had declined by 4% year over year in Q2 2017, marking the first contraction of the smartphone market in the country’s history.

Smartphone Shipments in India, Q2 2016 & Q2 2017 (millions and % change)

According to Canalys, 27 million smartphones shipped in the country in the second quarter of this year, down from 28 million during the same time period in 2016.

The dominant narrative regarding smartphone adoption in India is that it will continue at a decent clip, fueled by cheaper devices and falling prices for service plans.

eMarketer estimates that the number of smartphone users in the country will rise at a steady rate over the next few years, climbing from 267.1 million this year to 409.8 million in 2021. In addition, International Data Corporation (IDC) reported earlier this year that smartphone shipments in India had grown by about 5% between 2015 and 2016.

So what explains this decline? Canalys is chalking it up to apprehension among smartphone distributors and retailers over the possible effects of a new tax scheme, dubbed the Goods and Services Tax (GST), which took effect nationwide on July 1.

Implementation of the GST has been described as the most comprehensive tax reform ever undertaken in the country. The plan replaces a hodgepodge of taxes levied at the state level with a national tax. Resulting revenues will be split 50-50 between individual states and the federal government.

The tax reform has already had an effect on the nuts and bolts of India’s smartphone and ecommerce sectors. For example, under the old tax system, consumers buying iPhones would purchase the devices from online retailers based in states with a lower effective sales tax than their home states, pocketing their savings.

In theory, the GST will eliminate variation in tax rates from state to state, meaning that online retailers will lose their price advantage.

The GST has also had an effect on various other aspects of India’s digital economy. Subscription video-on-demand platform Netflix reduced the price of its service to account for a tax increase that came along with the GST rollout, ensuring that its customers would not have to pay for the difference.

And while Google once paid for taxes on purchases made via its Play Store in India, the company has now shifted that burden to developers selling their apps on the platform.

Rahul Chadha

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