Air-conditioners will be the worst-hit since they are already taxed at 28 percent under the goods and services tax regime
Households excited at the prospect of bringing home that new refrigerator or washing machine this festive season may face disappointment.
The government has doubled the basic customs duty on air conditioners, washing machines (up to 10 kg) and refrigerators to 20 percent making them 5-8 percent costlier.
“With the festive season right around the corner, the import duty hike is going to pose as a challenge to most consumer durable companies. While this change was anticipated, it came in sooner than expected and may impact the festive season sales to a great extent," said Gunjan Srivastava, MD & CEO, BSH Household Appliances.
In July 2018, the goods and services tax (GST) Council had reduced the tax rate on several products including televisions (up to 27 inch), refrigerators, food processors and washing machines from 28 percent to 18 percent. This has led to an 8-10 percent decrease in prices of these products.
The net benefit on these specific products after the customs duty increase will now be minimal.
Air-conditioners (ACs) could be the most hit. This is due to a triple whammy from a 28 percent GST, rupee depreciation and an increase in the customs duty.
Air-conditioner sales to take a hit
Air-conditioner sales pick up pace only in March-April. But the summer of 2019 could be extra hot with manufacturers planning significant price increases.
For compressors used in air-conditioners and refrigerators, the customs duty has been increased to 10 percent from 7.5 percent.
Kamal Nandi, Business Head & Executive Vice President, Godrej Appliances said any further devaluation of the rupee coupled with this hike in customs duties, puts immense pressure on the prices of ACs.
“In categories like air conditioners, this will lead to an adverse impact as the capacity built up in the country at present is not adequate to meet the current demand of the market,” he added.
Nandi said key components like compressors for ACs are also largely imported and increased prices will impact demand, which was already under pressure in the 2018 summer season.
While several appliance makers had pitched for a reduction in GST rates for ACs to 18 percent, the rates continue to stay at 28 percent. The Council's rationale is that ACs are luxury products.
Nandi said they expected at least the energy efficient ACs i.e. ACs with 3 star to 5-star energy rating, would be considered for reduced GST rates, given that the government and industry are jointly working towards the reduction in energy consumption under the BEE energy labeling programme.
Going forward, he said they are hopeful of revision in the tax for air conditioners. This would help boost its penetration levels in the country, which is currently at 3.6 percent.
Boost for Make in India
Nandi said the increase in customs duty on home appliances will go on to promote domestic manufacturing.
The government said the increase in the customs duty is to curb the import of certain imported items. These changes aim at narrowing the current account deficit.
Vijay Mansukhani, MD, Mirc Electronics (makers of Onida) said the duty increase is going to help in fiscal prudence and will strengthen the rupee, which will even benefit the industry at large.
The increase in customs duty on air conditioners in the short run to curtail the free fall of rupee, will not have much impact, Mansukhani said pointing out that it is not the season for air conditioner sales.
The increase in the customs duty is effective from September 27. The other products where customs duty has been hiked include footwear, speakers, aviation turbine fuel and semi-processed diamonds among others.
Rakesh Dugar, CMD of electronic goods company Mitashi Edutainment said the announcement of rate hikes across AC’s, refrigerators and washing machines does not come as a surprise, since the government has been promoting Make in India.He also added the government should focus on stopping the rupee from depreciating further to get the macroeconomic situation under control.