The government of Gujarat will lose around Rs 100 crore (Rs 1 billion) in sales tax over the next five years as the grey market for mobile phone handsets is flourishing in the state due to the octroi levied by the local bodies, said the Indian Cellular Association.

ICA said 75 per cent of the handsets are sold in the grey market in the state and demanded abolition of octroi.

"There are 13 million cellular phone subscribers in the state. This is expected to double by 2007. But grey market accounts for more than 70 per cent of the handset sales in the state because of the octroi imposed by the local bodies. The flourishing grey market will cause a loss of around Rs 100 crore in sales tax by 2007, " said Pankaj Mohindroo, national president, ICA.

"Octroi is levied in Maharashtra and Punjab. In Maharashtra, octroi will be abolished as soon as the state government bodies agreed to it. The Punjab government is planning to reduce octroi. We will demand abolition of octroi and take the matter to the chief minister," Mohindroo said.

The grey market claimed over 90 per cent share of the mobile handset sales until 2002, Mohindroo said.

In financial year 2002-03, the Union finance minister had rationalised the customs duty.

It was further rationalised to the level of 5 per cent in January 2004. All state governments have rationalised the sales tax to the level of four per cent, Mohindroo said.

There are now moves to rationalise it further to one per cent, Mohindroo said.

The grey market in the cellular industry at the national level has been reduced to 35 per cent in the last year and is expected to be further reduced to 20 per cent by the end of the financial year 2004-05.

While there is hardly any collection of octroi, the grey products enter the state very easily and the government loses sales tax due to this, Mohindroo said.

The cumulative sales tax revenue earned in the current scenario by 2007 would be Rs 40 crore (Rs 400 million), ICA said.

ICA is an organisation of manufacturers, distributors, retailers and eminent consumers of mobile handsets.

The prominent members of the ICA include Alcatel, Mitsubishi, Motorola, Nokia, Panasonic, Philips, Samsung, Siemens, Sony Ericsson, HCL Infosystems, Ingram Micro India and Salora International.

The association has been constituted to provide value and service to the cellular handset industry in India by fuelling its growth, improving competitiveness, creating a legal and ethical market and providing long term connectivity to the Indian masses.

The products enter Gujarat grey market from outside the country and the state.

These products are sold to the customers without any after-sales service and warranty. By removing octroi on mobile handsets, the sales tax revenue of the state will grow by 280 per cent by 2007.

The state will benefit from the establishment of a legal and ethical distribution and retail network, better customer service, increase in customer confidence and employment, ICA said.