Revenue Authorities Planning to Big Crackdown on Chinese Phonemakers, Allege Huge Losses in Sales Promotions Back by Fund Infusions

The government has opened a multi-agency probe against the Indian operations of top Chinese phone companies Xiaomi, Oppo and Vivo, amid allegations of “lapses and discrepancies” in their statutory financial filings and other reporting over the last few years, apart from looking into their business practices.

The agencies will seek to investigate if there was concealment of income, deliberate attempts to suppress profits to evade taxes, and abuse of dominant position in the smartphone market to the detriment of the local industry. Besides, policies related to alleged non-transparent methods in sourcing components and distribution of products will also be looked into, sources familiar with the deliberations said.

Top sources in the government told TOI that the widening of the probe comes amid the recent searches conducted against the Chinese makers by various agencies, including the income tax department and the Directorate of Revenue Intelligence (DRI).

Fair play regulator Competition Commission of India may also be roped in over charges of abuse of dominant position and restrictive trade practices, said a source.

“An initial assessment of the statutory financial reporting filed by the companies over the past few years has thrown up lapses, especially pointing to possible tax evasion, concealment of earnings, and manipulation of books. There are major concerns, and we are looking into all possible issues,” a top official said.

The matter is also being closely followed by the Ministry of Electronics and IT (Meity).

An analysis of filings with the registrar of companies (RoC) showed that the major Chinese handset players reported operational losses although they had strong sales and have been claiming top slots in the market league tables.

A detailed questionnaire sent to the Indian subsidiaries of Xiaomi, Oppo and Vivo remained unanswered at the time of going to press. Oppo and Vivo are owned by Chinese electronics giant BBK that also controls the OnePlus and RealMe brands that are sold in India.

Officials said that despite gaining in revenue and market share in India with a cumulative turnover of over Rs 1 lakh crore in 2019-20 (they haven’t filed financial records for fiscal 2020-21 yet), Xiaomi, Oppo and Vivo paid any taxes in India. “In fact, Oppo and Vivo have been showing negative net worth in India since fiscal 2016-17.”

In the case of Xiaomi, which claims to be the leader of the Indian smartphone market, losses have been heavy, though some of these have been negated through a special entry into the Profit & Loss statement (marked as profit from exceptional items), titled ‘reward received from Hong Kong’ for business performance. This was to the tune of Rs 2,447 crore in fiscal 2018-19, and Rs 3,277 crore in fiscal 2019-20.

In the last few years, as the sway of the Chinese companies grew in India, the hold of homegrown companies such as Lava, Karbonn, Micromax and Intex went down rapidly. The share of Indian companies in the smartphone market is in low-single digits, against a dominant position they occupied till a few years ago.

Another bone of contention is the reluctance of the Chinese companies – especially Oppo and Vivo — to align with local players for distribution. The companies prefer to have Chinese partners as Tier 1 distributors and have not opened up the chain.

“The same is the case when it comes to sourcing of parts and components, where there is complete lack of transparency. The Tier 1 suppliers, and even Tier 2, are mostly Chinese and this ensures that they tightly control the technology and pricing aspects,” an official said