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Impact of tax disputes on Xiaomi’s operations crucial for Telecom industry

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In Short:

Xiaomi India is facing regulatory and tax disputes, with its ability to continue as a going concern dependent on outcomes and additional funds from its Chinese parent. The company’s auditor and RoC filing highlight uncertainties and financial challenges, including a steep drop in revenue and net profit in FY23. Xiaomi has been defending against tax evasion allegations and scrutiny amid border tensions, indicating a challenging future for the India unit.

Xiaomi India’s Future Hinges on Regulatory and Tax Disputes

Xiaomi Technology India has stated in a recent Registrar of Companies (RoC) filing that its ability to “continue as a going concern” relies on the resolution of various regulatory and tax disputes, as well as receiving additional funds from its Chinese parent company. Despite these challenges, Xiaomi does not perceive an immediate threat to its existence “for the foreseeable future” based on legal opinions and cash flow projections.

Company Facing Regulatory Scrutiny

The company’s auditor, Price Waterhouse Chartered Accountants LLP, has highlighted uncertainties related to the outcomes of ongoing investigations and their potential impact on Xiaomi’s financial statements. These uncertainties raise concerns about the company’s ability to operate as a going concern, as noted in the RoC filing.

In recent years, Xiaomi has been subject to multiple probes from tax authorities, enforcement agencies, and customs departments, stemming from allegations of customs duty evasion and irregularities in royalty payments. These investigations have coincided with increased scrutiny on Chinese investments in India following border tensions.

Despite facing these challenges, Xiaomi has not responded to queries, leaving its future uncertain as its viability as a going concern remains under scrutiny.

Financial Challenges

The RoC filing also reveals a significant decline in Xiaomi India’s financial performance. Revenue dropped to Rs 26,697.18 crore in FY23 from Rs 39,099.68 crore in FY22, while net profit plummeted to Rs 238.63 crore from Rs 1,057.7 crore. The company reported a loss of Rs 1,875 crore in FY23 before exceptional items and tax, compared to a profit of Rs 1,420 crore in FY22.

Analysts attribute this decline to Xiaomi’s efforts to expand its offline retail presence, where operating costs are higher. An exceptional item of Rs 2,203 crore in FY23, related to operating margin compensation, helped mitigate some of the financial challenges faced by Xiaomi.

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