India has become the least favourable market, and it now makes business sense to exit and export from China, Finnish major Nokia has told the government. In a letter written this June, Nokia cautioned that the political risk of operating in India may impact future investment decisions.
Nokia urged the government to act quickly to correct the wrong perception of India as a place for business.
The telecom multinationals caveat came in the wake of fresh income tax disputes and delay in the refund of VAT. It is ominous in the current economic scenario in which foreign direct investment has become a trickle, institutional investors have been pulling out, and several investors have refused to take the plunge after wetting their toes.
In a non-paper dated June 19, 2013, Nokia sent a harsh, terse message to the Ministry of Commerce & Industry: India has suddenly become the least favourable market.
Technically, a non-paper is an unofficial document. It was received by the finance ministry last month.
It said that the non-refund of value-added tax by the Tamil Nadu government made it more cost efficient for Nokia to have transferred the manufacture of mobile phones to China and to import them to Indian market rather than manufacture them in Chennai.
Under an MoU signed with Tamil Nadu, the state was to refund the four per cent VAT Nokia pays on phones sold in the domestic market from its plant in the SEZ. The issue reached a flashpoint after currency fluctuations and China-Vietnam competition started eroding thin margins, especially in the low-end models.
The state has not issued a government order in accordance with the MoU, Nokia wrote in the non-paper.
The company has also mentioned the bilateral tax treaty between India and Finland, under which the software business is to be taxed in Finland, where Nokia is based.
In March, the finance ministry had served a retroactive income tax demand of Rs 2,080 crore on Nokia. The I-T department asked the company to pay the tax evaded on its royalty payment to Finland-based parent Nokia Oyj for downloading software on mobile devices manufactured at its Sriperumbudur facility since 2006.
This, Nokia has said, violates the bilateral tax treaty between the two countries. Nokia does not think India can override its international obligations and the mutual tax treaty, by introducing retroactive domestic laws without greatly disturbing the trust international business in India, it wrote.
Taxation, it said, should not drive business decisions on locating operations, but current tax claims against Nokia and other multinational companies operating in India have too great an impact on the predictability and certainty of Indian business environment to be ignored.
The political risk of operating in India has therefore become suddenly substantially higher and may inevitably influence future decisions to develop ones operations in India. Companies involved in tax disputes in India include Cadbury Plc, Royal Dutch Shell, Vodafone Plc and LG Electronics Inc.
Nokia said: A holistic view is needed to understand the big picture and to ensure that possible short term benefits of aggressively changed fiscal policies do not override long term policies to develop Indian economy, create growth and jobs by attracting investments into India with predictable business environment as has been done in the past...
It is very important that the Indian government corrects quickly these surprising actions of individual tax authorities against Nokia to restore the trust of Nokia and other multinational companies in India as a good place of business.
Asked for a comment on the document sent to the government, Nokia spokesperson Poonam Kaul said over the phone on Thursday evening: How will I know (about the non-paper)? It may have been sent by Nokia Finland. We have no concerns with the government. We had some challenges, but that is a public issue. The tax matter is sub judice. We cant comment.