Local production of mobile phones declined substantially in Bangladesh in April as manufacturers grappled with a massive drop in sales amidst the grey market's expansion.

About 14.78 lakh units of phones were manufactured in the month, a drop of 56.28 per cent year-on-year.

Feature phones accounted for 54.67 per cent while smartphones the rest, according to the latest data from the Bangladesh Telecommunication Regulatory Commission (BTRC).

Although the 6.68 lakh smartphones produced in April was the highest in six months, it was down 47.11 per cent compared to the same month a year earlier, highlighting the dire situation the local device manufacturers were in.

Production of 4G smartphones plummeted by over 61 per cent year-on-year in the first quarter of this year.

Industry people said there were multiple factors that led to the crisis, which they are terming "the battle of existence".

Due to the taka's sharp depreciation against the US dollar, import costs have increased. Moreover, there is a shortage of the greenback, making it challenging to open letters of credit.

High inflation, which is running at a decade high, has further reduced the purchasing power of smartphone enthusiasts.

Mobile sales experienced a year-on-year drop of more than 40 per cent in the first quarter of 2023 due to the economic slowdown, said industry people.

This has not always been the case. Production of handsets in Bangladesh has taken impressive strides in recent years, aided by the government's huge tax benefits unveiled in the fiscal year of 2017-18.

Since then, 15 plants have been set up, creating jobs for around 15,000 people.

Prior to the current fiscal year that began on July 1, 2022, there was about a 58 per cent tax on smartphone imports whereas the tax on locally assembled and manufactured handsets was 15 per cent to 20 per cent. But now it stands at 30 per cent to 35 per cent because of the imposition of a 5 per cent VAT on each of the three stages of sales -- from the factory to distributors and retailers.

"The imposition of VAT has led to the significant expansion of the grey market for handsets," Rizwanul Haque, vice-president of the Mobile Phone Industry Owners' Association of Bangladesh, told The Daily Star.

"Since the grey market doesn't require tax payments, it can offer lower prices to customers. Consequently, the government is losing a substantial amount of revenue."

He said authorised businesses want to pay all sorts of VAT and taxes.

"But the government must stop the inflow of phones through unauthorised channels to help us survive."

In a further blow to manufacturers, the revenue authority has proposed imposing more VAT at the production stage.

From the upcoming fiscal year, a 2 per cent VAT will be applicable for the first time on production making use of wholly locally-made components.

Moreover, the VAT applicable on handsets produced with at least two components made locally has been increased from 3 per cent to 5 per cent.

Similarly, the VAT on handsets assembled wholly with imported components has been increased from 5 per cent to 7.5 per cent.

"If the government thinks that it will not be able to reduce the tax, it must take steps to eliminate the grey market by running the National Equipment Identity Register (NEIR)," said Haque.

Set up by the BTRC in 2021, the NEIR is a system to ensure the use of valid mobile devices in the country through the incorporation of the IMEI with the customer's national identification number and SIM number.

However, its main functions such as blocking fake, unauthorised or cloned handsets in the network are not running yet.

"Bangladesh was a pioneer in setting up the NEIR. But we are witnessing other countries implementing it before us," said Mohammad Mesbah Uddin, chief marketing officer of Fair Electronics, Samsung's local assembly partner.

Pakistan and Nepal are running the NEIR to prevent illegal trade and promote local manufacturing opportunities, he said.

"The government has already invested in the NEIR infrastructure but has not started blocking illegally imported mobile phones."

"It is evident from the BTRC's recent data that local production of mobile phones has declined by more than 50 per cent which will directly impact employment and investment," he added.