Nokia has dominated Indian market over a decade. It enjoyed market share of 70-80% in India. Rest of the market share was distributed among Sony ericsson, LG, Samsung, Motorola, Alcatel. Today Indian handset industry is valued rs. 28000 crore per annum.
However having such a large industry was never a boom for Indian economy. It maybe called financial ignorance on the part of regulatory authority. To understand it no rocket science is needed. Lets understand it with a example. say Nokia launches a model ‘A’ in Indian market bearing a price of rs. 15000. In next 6 months price reduces to rs.6000 without any government relaxation to manufacturer. Interesting part is government do not earn anything on net profit when it was sold at rs. 15000.
please allow me to clarify it. when product A was launched in Indian market with a price tag of Rs.15000. then its Indian partner which is HCL was allowed to purchase it on say rs 13000. so all taxes were applicable on difference of 15000 and 13000 as profit tax. And this rs. 2000 was shared with National importer (HCL) then Regional distributor then micro distributor and then dealer. so government levied tax on this rs. 2000 as profit. which again may be adjusted against expenses say marketing and operational expenses. however government was not entitled profit tax for difference in cost and selling price. which is difference of rs. 5000 (cost price) and 13000 (transfer price to HCL).
Now the question is why government is not entitled tax or benefits on this difference ( difference in cost and selling price). First these handsets were not being produced in India. Now they have set up manufacturing units in India but for low end handsets. so HCL was importing handets from China, Taiwan, singapore or Finland. And at there transfer price was set up high so that profit could not be shared with Indian government as tax. second with most of the ountry india has double taxation treaty which allows manufacturer to pay tax on a particular head in one country only.
lets take example of it. In Singapore highest individual tax is 8% and in India it s 30% plus cess. So if a nokia personnel is recruited in India for a annual package of say Rs. 1 crore then tax will be at least 30 % i.e. 30 lacs. so what Nokia prefers is to station this person in Singapore and pay tax just rs. 8 lacs. In this e-age it is simple to mange work sitting abroad and with frequent visits. As air fare between Delhi and Singapore are cheaper than air fare between Delhi and Kerala.
Here is where brands like Karbonn, Maxx, Micromax , Lawa and spice saw the opportunity. Continue in part 2…
