No. It most likely will not directly impact their smartphone sales or market share. Their stock prices may temporarily fall only if they need to pay the entire 653 Crores, which they might or might not need to pay because there is a good chance Xiaomi might just defend themselves in court.
So, Xiaomi India was evading taxes. Total royalty and License fee was wrongly summed up, and they apparently owe 653 Crores. Might sound boring but let’s try to break this down.
Beginning with remitting “royalty and licence fee to Qualcomm USA” which just means they did not pay taxes to Qualcomm here.
The Directorate of Revenue Intelligence (DRI, responsible for national economic security) ran an investigation against Xiaomi India (& their respective contract manufacturers) and they found out that Xiaomi India was evading customs duty by “undervaluation”. Undervaluation basically means saying something is less valuable than it actually is.
And during this investigation, the DRI conducted searches at Xiaomi India and found a lot of “incriminating documents” or documents that look guilty or criminal, giving an impression that Xiaomi India did indeed avoid taxes by undervaluation, specifically to Qualcomm USA and to Beijing Xiaomi Mobile Software. The brand has to pay royalty to these brands for using their technology.
The investigation also says that the value of this royalty and license fee to those two companies (Qualcomm and Beijing Xiaomi Mobile Software) was not being added in the total transaction value of shipments imported by Xiaomi India, so naturally the transaction value is being under reported here.
“Mi” branded smartphones are either imported by Xiaomi or they are assembled in India after importing parts and components (from contract manufacturers). According to contract agreements, these are sold in India officially under the “Mi” branding, but the evidence according to the DRI Investigation says that the contract manufacturers and Xiaomi both, were not including the value of goods imported when calculating final value of taxes paid.
For those curious about what this violates, this is in violation of Section 14 of the Customs Act, 1962 and Customs valuation (determination of value of imported goods) Rules 2007. (Something to do with accurate determination of values of imported and exported goods and conversion of currency).
Xiaomi owns the smartphones, parts, and components too, and this seems to have caused a confusion as to what should and should not be included in the final tally, or they were cleverly evading payment of taxes.
Now, Xiaomi India has to pay 653 Crores (according to DRI Notice), which is the total amount of taxes that were evaded, and three “Show Cause Notices” were issued to recover the amount. A show-cause notice means representatives from Xiaomi India can still go to court and defend themselves.
Xiaomi India: Their response to the DRI Statements.
Xiaomi India has already issued a statement in response to the show-cause notices. This was the statement they gave: “At Xiaomi India, we give utmost importance to ensuring we comply with all Indian laws. We are currently reviewing the notice in detail. As a responsible company, we will support the authorities with all necessary documentation.”
This is the official statement from the Union Finance Ministry: “During the investigations, it further emerged that the royalty and licence fee paid by Xiaomi India to Qualcomm USA and to Beijing Xiaomi Mobile Software Co. Ltd., China (related party of Xiaomi India) were not being added in the transaction value of the goods imported by Xiaomi India and its contract manufacturers,”.
Here is another official statement from the finance ministry:
“Evidence gathered during the investigations by the DRI 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, which is in violation of the Customs Act and Customs valuation [determination of value of imported goods] Rules 2007. By not adding royalty and licence fee into the transaction value, Xiaomi India was evading customs duty, being the beneficial owner of such imported mobile phones, the parts and components thereof,”.
These statements are just what I tried to explain at the beginning of the post, just much more complex with words.
An expert’s opinion on this case was that global companies should pay more attention to local tax rules, which is true. Xiaomi claims that they operate legally worldwide, and they did not yet agree with Indian authorities on the due amount that is to be paid.
What makes this even more confusing is that all these tax evasions were dated April 1, 2017, to June 30, 2020, which have absolutely nothing to do with Xiaomi’s current business in India.
Most likely, the next step for Xiaomi will be finding lawyers to prove themselves not guilty.
This is a statement from someone called Ding (the same expert we mentioned earlier): “I don’t think the tax problem in India would have an impact on Xiaomi’s position in global and Indian markets,”. It looks like Xiaomi and the DRI had different opinions (what a surprise) on the determination of the price of imported goods. Should patent licence fees be included in the price of imported products? We don’t know, but according to Indian law we think it should be.
So, no, while prices of smartphones may increase due to other reasons, this tax evasion is not necessarily going to cause massive dips in Xiaomi’s market share, and it won’t make them lose their position in India or something. Xiaomi also sells their products at a loss in a lot of situations, so hiking smartphone prices is probably not something they will do.
In India, the 13,000- 20,000 segment is the most important one for smartphones and Xiaomi currently is doing great there, so increasing costs will only hurt their brand, we might see price hikes of 2000 rupees at most.
Some say this whole tax incident has political intention behind it but there are no sources to support this claim.
That is all we have for now. What do you think of the situation? Drop a comment down below. If Xiaomi India does defend themselves in court they might as well come off as innocent here, we have to wait and see how this goes.
Thank you for reading.