Prices of mobile handsets are likely to increase in Tamil Nadu as the state has hiked value-added tax (VAT) to 14.5 per cent from 4 per cent, a development that may promote grey market.

The state government, yesterday, announced that it would increase VAT from the present 4 per cent tax to 14.5 per cent on electronic goods like LCD panels, DVDs, mobile phones, iphones and ipods and the electronic components.

"Everyone is aghast by the announcement. This will impact the legal market and will promote grey market," Indian Cellular Association (ICA) President Pankaj Mohindroo told PTI.

According to ICA estimates, the mobile handset market is worth about Rs 2,500 crore. Of this, about 20 per cent would be coming from the grey market.

"This kind of differential VAT creates dissonance as far as end customer prices are concerned, since they have to pay different prices in different states," he said.

So, people would prefer to buy the same handset from other states at lower price (because of VAT) or buy the handset without a bill. Mohindroo said ICA would send its representatives to the state to discuss the matter.

"It is crucial that there is a level-playing field. The mobile handset market is a booming sector and such moves are roadblocks to the growth," he added. India is the fastest growing telecom market in the world, with an average monthly addition of 12-15 million subscribers.

Estimates suggest that the Indian mobile handset market is growing at about 15 per cent and was worth about Rs 33,171 crore in FY11.