Why has India become a "graveyard for foreign companies"?

Tech 2023-06-16 11:17:56 Source: Network

The Indian law enforcement agency has seized 55.51 billion rupees of funds from Xiaomi, equivalent to approximately 4

The Indian law enforcement agency has seized 55.51 billion rupees of funds from Xiaomi, equivalent to approximately 4.82 billion yuan. It is said that this is the largest amount of seizure by Indian authorities to date. Nowadays, there is still a risk of confiscation of 4.8 billion yuan.

According to Reuters, the Indian Law Enforcement Agency released a document on June 9th stating that it has issued formal notices to Xiaomi Technology India Private Limited, Xiaomi India Branch, some executives, as well as three banks including Citigroup, HSBC, and Deutsche Bank, alleging that they are suspected of violating India's Foreign Exchange Management Law.

India accuses Xiaomi of illegally remitting money to foreign entities through impersonating "royalties" in local departments. Xiaomi officials responded to the media that their attitude towards the case remains the same as before. Previously, in response to the court's rejection of the appeal, Xiaomi stated: "We are studying the matter and waiting for a written judgment. We hereby reiterate that our business in India complies with relevant laws and regulations in India

Less than a week later, India made new demands.

The Indian law enforcement agency has seized 55.51 billion rupees of funds from Xiaomi, equivalent to approximately 4.82 billion yuan. Image/China News Picture Network

According to the The Economic Times of India on the 13th, the Indian government asked Chinese smart phone manufacturers such as Xiaomi, OPPO, realme and vivo to appoint Indian nationals as CEO, COO, CFO and CTO.

In addition, the Indian government has instructed these enterprises to entrust contract manufacturing work to Indian companies, develop manufacturing processes involving local enterprises, and export through local distributors.

The report states that government officials have specifically instructed Chinese companies to comply with the law and not to evade taxes in India. ABP News Network in India reported that Indian government officials discussed these issues with Chinese smartphone manufacturers such as Xiaomi, OPPO, realme, and vivo at a recent meeting held by the Ministry of Electronics and Information Technology.

Where did the fine of 4.8 billion yuan come from?

The fine issued by Xiaomi this time can be traced back to the "illegal remittance" dispute that began in April last year.

On April 30, 2022 local time, the Indian Financial crime Fighting Agency said that it had confiscated the assets of Xiaomi Bank account after finding that Xiaomi Technology India Private Limited had remitted foreign currency to Xiaomi and two other foreign entities.

Xiaomi responded quickly that night and issued a statement saying: "These royalties paid by Xiaomi India are for the licensed technology and IP of our Indian version products. It is a legal business arrangement for Xiaomi India to pay such royalties."

Xiaomi also said in the statement that, as a brand committed to developing in India, all operations are in strict compliance with local laws and regulations. We have carefully studied the orders of the government authorities. We believe that the royalties and bills we pay to the banks are legal and genuine. However, we will work closely with government departments to clarify any misunderstandings

Later, Xiaomi filed a lawsuit with the High Court of Karnataka in southern South India against India's decision to crack down on Financial crime institutions. In August last year, Wang Xiang, then president of Xiaomi, also said that he was actively responding to the investigation of the Indian government at the financial analysis meeting of the second quarter of 2022 of Xiaomi Group. All business in India is still in normal progress, and has successfully unfrozen more than 700 million dollars of frozen funds.

However, things quickly reversed again. In October 2022, Indian authorities refused to unfreeze funds related to Xiaomi. In April of this year, Xiaomi India's appeal against the seizure of assets by the Indian law enforcement agency was rejected by an Indian court.

As the key to the debate between both parties, "Royalties are a common way for multinational enterprises to conduct reasonable tax planning, and differences mainly arise in the determination of fees." Lawyer Li Qin, who has long provided legal services for Chinese enterprises to invest in India, analyzed to China News Weekly that the essence of Xiaomi's remittance dispute is a tax issue. When calculating the tax base using royalties, There has been a dispute between enterprises and local governments regarding the interpretation of costs in tax laws.

For example, companies believe that "royalties" are reasonable tax planning or normal service trade for remitting funds, but the local government believes that the company's approach is an abuse of tax laws, which involves transferring profits overseas and related foreign exchange management laws.

The Indian Financial crime Combating Agency had previously said in a statement that Remittances from Xiaomi India to two other unidentified entities unrelated to the United States were also for the "ultimate interests of Xiaomi entities".

Xiaomi countered that the patent licensing fees paid by Xiaomi India were all for the licensed technology and patents on the Indian version of the phone, and pointed out that over 84% of the amount seized by law enforcement agencies was paid to Qualcomm as a licensing fee.

On June 9th of this year, the Indian Law Enforcement Agency issued another formal notice and added that the reason for notifying banks was because they allegedly approved foreign remittances known as "royalties" without conducting due diligence and obtaining necessary documents.

At present, the matter has not reached the point where the dust has settled, "Li Qin analyzed. According to India's Foreign Exchange Management Law, if you are not satisfied with the opinions of the administrative authorities, you can continue to appeal to the Foreign Exchange Management Special Court and the High Court.

Has India become a "graveyard for foreign companies"?

Xiaomi is far from the only Chinese mobile phone company that has received special attention.

In July 2022, OPPO was accused of evading customs duties of 43.9 billion Indian rupee, about 3.8 billion yuan. The Indian Tax Intelligence Agency stated that OPPO mistakenly used tariff exemptions when importing mobile phone parts and did not include royalties when calculating the transaction value of imported goods.

In the same month, vivo's 119 Indian related bank accounts were blocked by the Indian law enforcement agency, totaling 4.65 billion rupees, equivalent to approximately 400 million yuan. In a related statement, the Indian Law Enforcement Bureau accused Vivo India of remitting 624.76 billion rupees (approximately RMB 45.5 billion) to China and other places to avoid taxes, equivalent to about half of the company's revenue.

In terms of strict regulation of foreign-funded enterprises, India treats them equally.

In 2008, the Indian tax department issued a "penalty" of 7 billion rupees to Microsoft, and IBM India was also required by local regulatory authorities in 2013 to pay 53.57 billion rupees in outstanding tax, equivalent to 866 million US dollars. Indian media claims that Indian regulatory authorities believe that IBM falsely reported its revenue for the 2009 fiscal year.

Samsung Electronics has been punished by the Indian government more than once. In 2014, Samsung was fined $200 million in taxes in India. In January 2023, the Indian Tax Intelligence Agency accused Samsung of misclassifying remote radio heads in an attempt to evade import tariffs of 17.28 billion rupees, equivalent to approximately $212 million.

According to the data released by Indian officials, from 2014 to November 2021, 2783 foreign companies registered in India have closed their businesses in India, accounting for about one sixth of multinational companies in India. The companies evacuated include French retail giant Carrefour, American motorcycle manufacturer Harley Davidson and American Motors Corporation Ford.

Due to the frequent suppression of foreign companies in India, India is also known as the "graveyard of foreign companies". Li Qin once wrote an article analyzing that the various investigations and punishments suffered by foreign-funded enterprises in India are largely due to the "magical" Indian legal system. Indian laws can be summarized in 15 words: "High standard legislation, universal violations, Selective enforcement."

High standard legislation does not mean that India's legislative skills are high, but rather that Indian legislators require law-abiding individuals to meet very high standards. For example, Li Qin stated that the Indian Companies Act itself has nearly 30 chapters and 500 articles, with almost every article followed by illegal consequences such as fines and imprisonment. Indian law enforcement agencies generally do not proactively notify companies to correct their non compliant behavior, Once an illegal act is discovered by the administrative law enforcement department, the fine will be calculated from the first day of the violation.

Amidst various factors, India is still considered one of the "most difficult countries to do business in the world" in the 2020 Global Business Environment Report released by the World Bank.

The 'Indian market' that is difficult to part with

Even so, a large number of foreign enterprises, especially domestic mobile phone manufacturers, still consider India as an important overseas market and make long-term layout and planning.

The domestic smartphone market has become saturated, and there is no revolutionary technology emerging in the product end, which cannot stimulate new consumer demand. Domestic smartphone manufacturers are searching for new markets overseas, "Yang Shucheng, Secretary General of the China India Vietnam Electronics Association (CMA), said in an interview with China News Weekly. India's consumer market with a population of 1.4 billion was in the window period of upgrading from functional phones to smart phones at that time. "The space of the Indian mobile phone market and the Demographic dividend are obvious."

In 2014, Xiaomi entered India. During the same period, brands such as vivo and OPPO also set sail, with Chinese mobile phone companies occupying over 70% of the market share in India.

In the third quarter of 2017, Xiaomi won the first place in the Indian market share with 9.2 million mobile phone shipments and a 23.5% market share. Compared to the same period in 2016, Xiaomi India has grown by about 300%, becoming the fastest-growing smartphone brand in the Indian market. Meanwhile, India has also become Xiaomi's largest overseas market.

However, with the dispute over "illegal remittances", Xiaomi has started to decline in the Indian market.

According to Canalys data, Xiaomi (including its sub brand POCO) shipped 29.6 million units in the Indian market in 2022, a decrease of over 26% from 40.2 million units in 2021. Although it remains the sales champion in the Indian market, its market share for the year has dropped to 20%, a decrease of 5 percentage points from 25% in 2021.

In the first quarter of 2023, there was a significant change in the sales ranking of the Indian market. Samsung ranks first with a 20% market share, vivo second with a 17% market share, Xiaomi third with a 16% market share, and OPPO and Realme behind. Chinese mobile phone brands account for approximately 50% of the local market share.

Liu Xiaoxue, associate researcher of the Asia Pacific and Global Strategy Research Institute of the Chinese Academy of Social Sciences, said to China Newsweek that Chinese mobile phone manufacturers still occupy Absolute advantage in the Indian market, but India is more eager to develop its local manufacturing industry, and Chinese enterprises have naturally become the primary target of India's "market for technology".

Not long ago, the Indian government once again requested Chinese mobile phone brands, including Xiaomi, OPPO, vivo, realme, etc.: Chinese mobile phone brands operating in India should appoint Indian nationals to senior positions such as CEO, COO, CFO, and CTO.

In fact, many Chinese mobile phone manufacturers operating in India have already appointed Indian executives, such as Madhav Sheth, the Indian CEO of Realme.

The diversity of the Indian market is beyond imagination. In order to successfully enter the local market, many companies have already started hiring Indian executives before this requirement. Liu Xiaoxue said that from a corporate perspective, as long as they can still profit in the new market, they will continue to make efforts. The strategy of multinational corporations to open up new overseas markets will not be easily changed due to individual policies, and Xiaomi's experience does not mean that foreign-funded enterprises will withdraw on a large scale.

However, Arvind Subramanian, the former chief economic adviser of the Indian government and a senior researcher of Brown University, published an article in Foreign Affairs magazine last year, "Why India cannot replace China", and pointed out that if India does not address the three major obstacles, namely, "too high investment risk, too strong policy introversion, and too large macroeconomic imbalance", it will miss the opportunities for multinational enterprises to invest and undertake industrial transfer.

Reporter: Li Mingzi

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