Corruption Challenges – Lokpal, POCA, etc

What is the Xiaomi Scam?


From UPSC perspective, the following things are important :

Prelims level : Enforcement Directorate, PMLA

Mains level : Tax evasion

Last week, the Enforcement Directorate had seized Rs 5551.27 crore ($725 million) from the local bank accounts of the Chinese smartphones company, Xiaomi.

Unfolding the Xiaomi Scam

  • Xiaomi faces charges of having made illegal remittances to foreign entities by passing them off as royalty payments.
  • It is a charge that Xiaomi has been continuously facing in India.
  • The ‘royalty and licence fee’ paid by Xiaomi India were not being added to the transaction value of the goods imported by the company and its contract manufacturers.
  • By not adding “royalty and licence fee” into the transaction value, Xiaomi was evading Customs duty.

What is the recent probe?

  • The Enforcement Directorate has seized the bank account assets from Xiaomi Technology India, under the provisions of Foreign Exchange Management Act (FEMA.
  • The company had remitted over Rs 5500 crore to foreign-based entities, including one Xiaomi group entity, in the guise of royalty payments.
  • Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities.

Xiaomi’s response

  • Xiaomi, for its part, said that it is committed to working closely with government authorities to clarify any misunderstandings.
  • It argued that the royalty payments and statements to the bank are all legit and truthful and were made for the in-licensed technologies and IPs used in our Indian version products.
  • It is a legitimate commercial arrangement for Xiaomi India to make such royalty payments.
  • But it is a typical corporate response, something on the lines that Xiaomi did on the previous occasion too.

How has China responded?

  • China firmly support its companies in protecting their lawful rights and interests.
  • It urged India to provide a fair, just and non-discriminatory business environment for Chinese companies making investment and operating in the country.
  • It is visible that China has made a dovish statement as they usually do.
  • Xiaomi now has alleged its top executives faced threats of “physical violence” and coercion during questioning by ED.

Indian govt on strong wicket

  • Indian governmental authorities have made it clear that the Chinese companies were not being targeted.
  • And financial misdemeanours had indeed been committed by these companies.
  • The government has also explained the various cases in details and what it has seized so far.
  • But the Chinese companies seem to be playing the victim card.

Back2Basics: Directorate of Enforcement (ED)

  • ED is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime (esp Money Laundering) in India.
  • It is part of the Department of Revenue of the Ministry of Finance.
  • It is composed of officers from the Indian Revenue Service, Indian Police Service and the Indian Administrative Service as well as promoted officers from its own cadre.
  • The total strength of the department is less than 2000 officers out of which around 70% of officials came from deputation from other organizations while ED has its own cadre, too.
  • The prime objective of the Enforcement Directorate is the enforcement of two key Acts namely:
  1. Foreign Exchange Management Act 1999 (FEMA) and
  2. Prevention of Money Laundering Act 2002 (PMLA)


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