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, 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:
- Foreign Exchange Management Act 1999 (FEMA) and
- Prevention of Money Laundering Act 2002 (PMLA)