Cellphones: hands down

As the budget season approaches, a further hike in import duties for mobile phones cannot be ruled out. Contrary to popular opinion, however, imports of mobile phones don’t weigh too heavy on the country’s import bill. Based on SBP data, handset imports had an average share of 1.4 percent in total imports in the last five fiscals. That share has gone down to 1.1 percent in the July-April period this year.

Already, there is a visible decline in cellphone imports in 10MFY19. At $498 million, the decrease of 18 percent year-on-year is more than the 5 percent reduction in the overall goods’ imports. At this level, mobile-phone imports in 2019 have reverted back to 2015 levels – about $50 million imports per month.

There are two plausible reasons behind this drawdown. First up, the gradual fiscal tightening on these imports is leading to devices becoming expensive. Over time, a variety of duties – regulatory duty (RD), sales tax, withholding tax, mobile levy, etc. – have been levied on phone imports. What bites the most is RD, which was recently revised to new highs in March this year.

The current duty regime penalizes high-end phones the most and goes soft on low-end phones – a sound policy. For instance, a phone having a C&F value up to $30 would have a total tax/duty of Rs400. But a phone having a C&F value above $500 would carry Rs41,000 in taxes and duties to import it in. The RD makes up the bulk of the final liability, accounting for about 45 percent for each of the six price-slabs.

It’s natural that those crushing duties lead to growth in smuggling of phones through different channels, including passenger baggage. But the government has been tying to enforce a strict mechanism for handset declaration at airports. Under the PTA’s Device Identification, Registration and Blocking System, only one device can be brought in duty-free; more than one device is taxed as per applicable rates.

And second, it’s the broader economy that may be taking a toll on wireless imports. If higher duties weren’t already enough, mobile-phone imports are made even more expensive by the beating that PKR has been taking against the greenback in recent months. Uncertainty as to how much more PKR has to fall may be affecting the decision-making of vendors and preferences of savvy users.

Also, the ongoing economic slowdown is bound to impact the consumer propensity to purchase discretionary products, such as a brand-new smartphone. Huawei, which is a leader in medium- to low-end smartphones, could have capitalized on this situation through its pricing edge. That business is mired in uncertainty, though. These factors may lead to growth in cellphone sales in the second-hand markets.