It’s been a rough week for the Indian economy. The rupee scraped new lows most days this week, stocks sank and bond yields rose. Though there has been some respite towards the close of the week, a gloom has descended over the land. And it’s about to get darker.
The Indian Express newspaper reports today that Nokia, once a great champion of India, is considering shutting down its factory in the southern state of Tamil Nadu. With 8,000 employees, it is one of the largest Nokia operates, and has so far produced some 800 million phones.
According to the paper, Nokia said in an unofficial letter to the Ministry of Commerce and Industry that it would be “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.” The letter was written in June and received by the ministry last month, pre-dating the current rupee crisis. But the timing of its release couldn’t be worse. Already foreign investors are wary of putting money in India and many who can are pulling their cash out.
Nokia’s reasons are twofold. First, the state of Tamil Nadu had agreed to give Nokia back the 4% value-added tax that the company had paid on phones shipped from its factories there. This has not happened, according to Nokia. Second, the central government is seeking Rs 20.8 billion ($329 million) in back taxes on income from downloads on phones made in India. Nokia says a bilateral tax treaty between India and Finland, where it is headquartered, negates the need to pay such taxes. India is embroiled in tax disputes with various other multinational firms, including Vodafone and Shell.
“Taxation 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 company wrote. “The political risk of operating in India has therefore become suddenly substantially higher and may inevitably influence future decisions to develop one’s operations in India.”
Nokia was for many years the largest-selling mobile phone in India, thanks to its deep roots in and understanding of the market, cheap and hardy phones, and good reputation. But Samsung unseated Nokia in the first quarter of this year despite strong sales of its low-end smartphones and a new, semi-smart $99 model released earlier this year.