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Mobile phones: A growing black market

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Smuggling is hurting the national economy

By Syed M. Aslam
May 01 - 07, 2000

The government's resolve to deal with the menace of smuggling with an iron glove this time around highlights the importance it attaches to control a trade which is critically hurting the economy of the country. Just how badly smuggling is hurting the national economy can well be illustrated by the thriving black market of cellular phones in the country.

The illegal trade of mobile phones is not only depriving the government millions in lost revenue but is also hampering the growth of the market due to loss of customer trust. The absence of customer trust is fuelled by the rampant unethical practices in the market, the majority of which is fed by the smuggled mobile sets, the most common being sales of stolen or used sets as new and fake accessories such as batteries and chargers.

Talking to PAGE, country manager of Axiom Telecom, Imran Owais Kazmi said that the high landed costs are severely discouraging the use of legally imported sets leaving the market wide open for the smuggled counterparts. The withdrawal of duty and taxes on the import of mobile sets last year has been neutralised by the imposition of GST at present to render the imports extremely incompetitive to smuggled products, he added.

The landed cost of imported mobile phones, he said, is as much as 25 per cent higher than the sets which find their way into the country illegally. For instance, the landed cost of a bulk shipment of high-priced GSM sets works out a high 30-40 per cent including freight. In a price driven market like Pakistan who would like to pay 25 per cent more for a legally imported set when the similar products are easily available in market at a much lower price.

The flourishing of the illegal trade is also encouraged as it works in the benefit of the customer who can buy the smuggled sets at much lower prices than its legally imported counterparts. The illegal trade far outnumbers the legal trade as it enjoys a big edge over the later which is subjected to 30 per cent plus duties and levies compared to 5 per cent costs for the former.

Last year the duty and taxes on the import of mobile phones were abolished to enable the legally imported sets competitive edge against the smuggled counterparts. The edge, however, has almost been blunted with the imposition of the GST at present reversing the situation back to the pre Statutory Regulatory Order 511 abolishing the import tariff.

The problem is further aggravated as the imports of mobile sets and accessories can only be exercised through the three cellular operators in Pakistan — Mobilink, Instaphone and Paktel. Besides the GST which renders the imports incompetitive compared to the massive volume of contrabands available in the country the mobile telephone subscribers have to pay fixed amount of Rs 1,250 connection fee to the government which is the government's way of ensuring revenue generation from every new mobile phone connection whether the set is legally imported into the country or otherwise.

Imran also blamed the lack of growth of the cellular market, which has remained stagnant at 300,000 subscribers since early 1990s in Pakistan, on the easy availability of sets which finds their way at the shops across the country. The variable pricing based on 'catch the customer' philosophy, rampant sales of stolen and used sets, non-genuine accessories has demoralised the potential buyers from freely shopping around. This in turn has resulted in an overall decreased rate of mobile connections and sales of sets and accessories.

Imran suggested that the impact of the black market can be lessened if the government impose a fixed 5 per cent tax on the purchase price internationally. Furthermore, expanding the import permission to the set manufacturers, or their agents, will also help encourage the legal imports, he added. As is, the electronic markets across the country are stacked with mobile sets of all makes and price ranges which find their way into the country illegally. While the legal imports can only be exercised through the three mobile operators — Mobilink, Instaphone and Paktel — the bulk of the new customers prefer to buy their own sets from the markets which primarily markets the smuggled sets.

So what could be done to lessen the impact of the black market? Imran suggested that replacing the GST with the imposition of a fixed tax of 5 per cent of the international retail price of mobile sets can help fetch government a sizeable revenue. By replacing the GST with the fixed tax the government will be able to earn the revenue which it is currently deprived of due to prevalent preference to buy smuggled sets which are easily available across the country.

Imran said that all mobile manufacturers, or their agents, should be allowed to import hand sets into country. Rejecting the notion that allowing the manufacturers to import the sets would limit competition, he said, that "with a low per capita income no manufacturer will be foolish enough to charge exorbitant margins which would eventually result in a new face of the black market." In fact, expanding the import facility to the manufacturers will result in better customer service and availability of guaranteed genuine sets and accessories to boost the rate of connectivity which remains stagnant due to these impediments at present, he added.