Xiaomi could be 'adversely affected' by tax allegations in India

India wants low-end Chinese smartphones out – and its efforts may be working

Chinese gadget giant Xiaomi has warned in its April-June 2022 earnings report that its troubles in India – related to allegations of improperly moving funds offshore – could noticeably affect business.

The company admitted [PDF] the investigations and allegations "could take a long period of time to settle, and the Group could receive judgments or enter into settlements that may adversely affect its operating results or cash flows." Xiaomi added that "it is not practical to quantify related financial effects at this stage."

In late April, the Indian government seized over $724 million of Xiaomi's bank deposits. The Department of Revenue said the amount was equal to funds sent abroad under the guise of paying royalties without any services provided in return.

Xiaomi denied the accusations, calling all royalty payments "legit and truthful."

The company is also facing charges of customs duty evasion. In its earnings report, it noted it was under investigation by authorities including the Income Tax Department, the Directorate of Revenue Intelligence, and the Directorate of Enforcement "in relation to compliance of relevant income tax regulations, custom duties regulations as well as foreign exchange regulations."

Xiaomi remains India's phone market leader. In its second quarter, it reported "smartphone shipments ranked number one in India for the 19th consecutive quarter."

Globally, smartphone sales worldwide have been dropping, but Xiaomi claimed to buck the trend. Despite an eight percent quarter-over-quarter reduction industry-wide in smartphone shipments, Xiaomi said in its earnings call that it "still achieved quarter-over-quarter growth" for shipments, and even increased global market share "for two consecutive quarters from 12.5 percent in Q4 2021 to 13.8 percent in Q2 2022."

Despite this, revenue fell over 20 percent to $10.2 billion. Net income fell a whopping 83.5 percent to $204 million.

Chinese companies lay claim to most of the lower-end smartphone market in India – a situation the government would like to change. The country has even increased efforts to develop its right-to-repair framework to bolster parts of its economy, rather than redirect its funds overseas. Reports have also revealed that the government is actively trying to eject China completely from the market for phones costing less than $150.

Chinese gadget company Vivo, which holds around 15 percent of India's smartphone market, has also had its offices raided by India's Department of Revenue over alleged efforts to avoid taxes. Oppo – another Chinese maker – was also raided for alleged tax evasion.

In late July, Chinese majority state-owned smartphone company Honor's CEO said it was pulling out of India for "obvious" reasons. However, Honor, which sells low to mid-range handsets, peaked in India in 2018 with a paltry three percent market share anyway. ®