A Xiaomi Redmi Note 7 Pro smartphone in India. The Indian branch of the firm has been investigated for allegedly avoiding tax on imported goods. Photo: AFP / Imaginechina

JAIPUR – India’s Finance Ministry has alleged Chinese technology and smartphone maker Xiaomi Technology has evaded customs taxes worth US$87.8 million, a charged allegation that threatens to dampen otherwise booming bilateral trade.

Three show-cause notices have been issued to Xiaomi Technology India under provisions of the Customs Act demanding the recovery of duties for three years starting from April 2017 to June 2020 on alleged under-invoicing of imports.

Xiaomi has told local Indian news outlets that it was reviewing the notices and said it would soon supply authorities with the required documents. At the same time, a recent Caixin Global report claimed Xiaomi Corp had “objected” to the Indian government’s demands, contradicting what Xiaomi told Indian media.

The Chinese company’s contradictory messaging has stirred a firestorm of sorts in India.

Rajesh Kothari, a former vice-chancellor at ICFAI University in Jaipur, questioned Xiaomi’s stance in the Chinese media report. “The action taken by the government of India seems fully justified. No organization is bigger than the rules and regulations of the country, be it a domestic player or multinational,” he said.

“The multinational corporations must respect the rule of the land – rather, they should set an example of a law-abiding corporate citizen to win over the trust of stakeholders,” Kothari added.

Faisal Kawoosa, the founder and chief analyst at technology market research firm Techarc, echoed that view: “I think corporate governance and adherence to the regulations and laws is mandatory, irrespective of (being a) local or a foreign company.” 

Vague details of the tax evasion allegation are slowly trickling out.

A press release from the finance ministry said: “Based upon intelligence that Xiaomi Technology India Private Limited (Xiaomi India) was evading customs duty by way of undervaluation, an investigation was initiated by the Directorate of Revenue Intelligence (DRI) against Xiaomi India and its contract manufacturers.”

The ministry said that during the investigation, searches were conducted by the DRI at the premises of Xiaomi India, which led to the recovery of incriminating documents indicating Xiaomi India was remitting royalty and license fees to Qualcomm USA and Beijing Xiaomi Mobile Software Co Ltd, under contractual obligation.

“Statements of key persons of Xiaomi India and its contract manufactures were recorded, during which one of the directors of Xiaomi India confirmed the said payments,” the DRI said.

Some of Xiaomi’s phones. Photo: Handout

In its statement, the ministry said its investigations showed that the “royalty and license fee” paid by Xiaomi India to Qualcomm USA and Beijing Xiaomi Mobile Software Co Ltd, China – a related party of Xiaomi India – were not added to the transaction value of goods imported by Xiaomi India and its contract manufacturers.

“The investigations conducted by the DRI also showed that Xiaomi India is engaged in the sale of MI brand mobile phones and these mobile phones are either imported by Xiaomi India or assembled in India by importing parts and components of mobile phones by contract manufacturers of Xiaomi India,” the statement said.

The statement pointed out that MI brand mobile phones manufactured by the contract manufacturers were sold exclusively to Xiaomi India, in line with the contract agreement.

Evidence gathered during the DRI investigations indicated that neither Xiaomi India nor its contract manufactures were including the amount of royalty paid by Xiaomi India in the assessable value of the goods imported by Xiaomi India and its contract manufacturers, an apparent violation of Section 14 of the Customs Act, 1962, and Customs Valuation Rules, 2007.

It noted that by not adding the “royalty and license fee” in the transaction value, Xiaomi India was evading customs duty as it was the beneficial owner of the imported mobile phones, parts and components.

Xiaomi has not yet elaborated on its objection to the allegations indicated in the Caixin Global report. But analysts and observers are already speculating on whether Beijing will consider the tax evasion allegation as politicized and if the case will damage wider trade and investment ties.

Bilateral trade touched new highs in 2021. According to China’s General Administration of Customs (GAC) data, bilateral trade between the two neighbors totaled more than US$114 billion, up 46.4% year-on-year from January to November 2021.

Trade between the two Asian giants has steadily grown over the last two decades, up from a modest $1.83 billion in 2001. At the same time, recent lethal border clashes between Chinese and Indian troops have sparked local calls to boycott Chinese goods and products.

A member of the City Youth organization wears a facemask with an inscription that reads ‘Ban China’ as he pays tribute along with others to the soldiers who lost their lives following a recent clash between India and China, in Hyderabad on June 17, 2020. Photo: AFP

Views of the tax evasion case are thus mixed. A mobile phone industry veteran who requested anonymity said it looks like the tax evasion charge is warranted. 

“It cannot be perceived as an action against a Chinese company as we have many other Chinese mobile phone and consumer goods companies operating in India and they have not been investigated on this ground,” he said. “Possibly it could be a case of interpretation of the law on how does one arrive at the assessable value of goods for Custom Duty calculation.

“I do not think it will have any impact on foreign investments in India, which has many multinational companies already operating for years and one specific case should not impact the overall foreign investment environment,” he added.

Techarc’s Faisal has a similar view of the case. He characterized the tax charge as a “corporate miss” – whether intentional or unintentional, only an inquiry can decide – and could happen with any company, irrespective of its origin. 

“We should not position it as foreign versus domestic or Chinese versus Indian as that will only hurt sentiments unnecessarily and wrongly send out a message about India being tough with foreign companies,” he said.

“That is not the case and this government has been working day in and out on elevating ease of doing business for both local as well as foreign companies,” he added. 

Follow Anil Sharma on Twitter at @anilsharma45