Outcome of tax disputes holds key to Xiaomi’s ops

Xiaomi Technology India has said its ability to “continue as a going concern” is dependent on the outcome of multiple regulatory and tax disputes as well as additional funds from the Chinese parent. However, it doesn’t see a threat “for the foreseeable future” based on legal opinions it has obtained and cash flow projections. This is contained in the May 2 Registrar of Companies (RoC) filing by the India unit of the Chinese smartphone maker.

The company’s auditor Price Waterhouse Chartered Accountants LLP has made similar observations in the filing on viability and the requirement of funds.

Co Facing Multiple Probes

The auditor noted the “financial statements describe the uncertainties regarding the likely outcome and the management’s assessment of the likely impact of these matters on the financial statements. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the ability of the company to continue as a going concern.”

Xiaomi didn’t respond to queries.

In the past few years, Xiaomi has had to face multiple investigations and legal proceedings launched by the income tax authorities, the Directorate of Enforcement and the customs department on matters such as the alleged evasion of custom duty and irregularities in royalty payments. This has come amid heightened scrutiny of Chinese companies and their investments in the country after a rise in border tensions.

While Xiaomi defends its position against tax evasion allegations, bank accounts being frozen and staggering customs duty demands, the auditor's opinion on viability as a going concern makes the India unit’s future appear challenging, said Mohit Yadav, founder of business intelligence firm AltInfo.

DETERIORATING FINANCIALS

The RoC filing is also revealing about the steep drop in Xiaomi India’s financials. Revenue from operations crashed to Rs 26,697.18 crore in FY23 from a high of Rs 39,099.68 crore in FY22. Net profit plunged to Rs 238.63 crore from Rs 1,057.7 crore. The company didn’t provide any reasons for this. In fact, Xiaomi posted a loss of Rs 1,875 crore before exceptional items and tax in FY23 compared with a corresponding profit of Rs 1,420 crore in FY22. The filing shows Xiaomi’s expenditure overshot revenue in FY23. Analysts tracking the sector said one of the reasons could be that the company has been trying to expand in offline retail where the cost of operations is higher.

An exceptional item in FY23 attributed to operating margin compensation to the tune of Rs 2,203 crore, helped shore up Xiaomi’s numbers. There was no explanatory note on this.