The decision of the Maharashtra government to hike VAT (value-added tax) on mobile handsets could actually result in a drop in the states VAT collections, says Indian Cellular Association, the industry body for handset manufacturers.

In the state budget, the government last week proposed to increase VAT to 12.5% from 4% on mobile handsets without making the revenue targets from the move public.

According to ICA, the proposed hike in VAT will result in handset sales falling in the organised retail sector in Maharashtra. It is currently at 1.25 crore units annually and could reduce to as low as 8 lakh units. With reduced sales, the estimated VAT collection will also be down from Rs 168 crore annually to Rs 33.5 crore, as per ICA estimates.

Over a three year period, the Maharashtra government will lose around Rs 475 crore in revenue, if it imposes the proposed hike in VAT on mobile phones. The move will trigger increased grey market sales and could expose customers to phones of dubious quality. A common man, who buys a Rs 1,500 entry-level phone will now have to pay Rs 127 more.

Our experience shows that Rs 30 is the point at which the consumer turns away from the official market to the grey market. If the proposal is implemented, retail outlets will be under pressure, ICA national president Pankaj Mohindroo told ET. ICA has also written a letter to Maharastra chief minister Ashok Chavan requesting the government to take a closer look at the issue. Importantly, Maharashtra is the only state in the country to have a 12.5% VAT on mobiles it is 4% in other parts of India.

According to industry estimates, Maharashtra has about 20,000 retailers and over 450 distributors. Over 1.5 lakh people are employed. If the grey market resurfaces, the employment in the industry will be hurt, Mr Mohindroo said.

Infiniti Retail CEO & MD Ajit Joshi said at a time when mobile phone penetration was increasing, even in rural areas, such a step would not be viewed as positive.

The governments aim of taking broadband to rural areas will not be met, if handset prices go up due to the increase in VAT because Indian consumers are extremely price sensitive, he said. Infiniti, a 100% subsidiary of Tata Sons, owns and runs the Croma chain of consumer electronics and durables. Also, the government has clubbed mobiles with liquor and cigarettes, which also attract a 12.5% VAT. However, mobile is a tool for connectivity and not a luxury item, Mr Joshi said.

Rajiv Agarwal, CEO of Essar-owned The MobileStore, said telecom is an essential part of the India growth story and has a direct connection with development. One state having a differential VAT will create an anomaly. People will buy from neighbouring states and sell here. It is not beneficial for customers, who want warranties, he said. He added that the decision was not one that augured well for the industry.