India's tax law becomes an expansion "roadblock" as Apple urgently lobbies to resolve the billion-dollar tax burden issue

According to informed sources, Apple (AAPL.US) is lobbying the Indian government to amend its income tax laws to ensure that the ownership of high-end iPhone production equipment provided to contract manufacturers is exempt from taxation. The sources pointed out that this tax issue has become an obstacle to Apple's future expansion in India.

This move comes as Apple accelerates its layout in India, seeking to diversify its supply chain outside of China. Market research firm Counterpoint reports that since 2022, the market share of iPhones in India has doubled to 8%. Although China still accounts for 75% of global iPhone shipments, India's share has tripled during the same period, reaching 25%.

As the world's second-largest mobile market, India holds significant strategic importance for Apple. Currently, Apple's contract manufacturer Foxconn and Tata Group have invested billions of dollars to establish five factories in India. However, a considerable portion of these investments is allocated to procuring expensive iPhone assembly equipment.

Tax experts indicate that the tax law enacted in India in 1961 has clear provisions regarding foreign companies' ownership of equipment in India. If Apple does not push the Indian government to amend this regulation and adjust its business model, it may face billions of dollars in additional tax burdens.

In China, where the supply chain layout is mature, Apple's operational model is entirely different. Apple is responsible for procuring iPhone production equipment and delivering it to contract manufacturers. Even if the ownership of the equipment belongs to Apple, there is no tax obligation for this.

However, the situation in India is entirely the opposite. A senior Indian government official and two industry insiders explained that under India's Income Tax Act, Apple's ownership of production equipment would be classified as "business-related." This classification would result in Apple's iPhone-related profits being subject to taxation in India.

The sources added that, given concerns that the current regulations could hinder growth, Apple executives have held multiple discussions with Indian officials in recent months to advocate for tax law amendments.

"The investment capacity of contract manufacturers is limited," one industry insider stated. "If this old regulation can be amended, Apple's expansion process will be significantly accelerated, and India's competitiveness in the global smartphone manufacturing sector will also improve."

In response, Apple did not comment on the request for feedback, and the Indian Ministry of Information Technology and Ministry of Finance, involved in the discussions, also did not respond.

India cautiously assesses Apple's request

Developing the smartphone manufacturing industry is one of the core pillars of Prime Minister Modi's governance agenda. However, the Indian Deputy Minister of Information Technology stated in a private setting last year that due to lower tariffs on mobile components in China and Vietnam, these countries may lead in the competition for smartphone export hubs over India.

A senior Indian government official confirmed, "Discussions are ongoing regarding the tax rules affecting Apple," but the Indian government's stance is cautious. Its core concern is that amending the tax law may undermine India's sovereignty in taxing foreign companies.

"This is a difficult trade-off," the official admitted, noting that Apple's increased investment in India is equally important for the country. "India needs foreign investment, and we must find a balance." Since 2023, Apple has opened several direct retail stores in India and sells products through online and offline distributors. Over the years, Foxconn and Tata Group's investment in Apple's production base in India has exceeded $5 billion.

The cost of specialized equipment reaches billions

Tax experts often cite the case of Formula 1 racing in the UK to illustrate the applicable logic of Indian tax law. In 2017, the Supreme Court of India ruled that although F1 did not own the track near New Delhi, it had complete control over the track during the Indian Grand Prix, and therefore had to pay taxes on profits during the event.

Experts point out that under current regulations, if Apple holds ownership of equipment in its iPhone factory in India, it would be deemed to have actual control over the factory, thereby triggering tax obligations.

"If Apple's related activities are deemed to be 'business-related,' its global revenue could be used as the basis for calculating taxable income in India, leading to a tax exposure of billions of dollars," noted Riaz Thingna, a partner at Grant Thornton Bharat LLP.

Customs data shows that Foxconn is Apple's largest contract manufacturer in India. As of August this year, Foxconn's shipment value from its Indian factories has reached $7.4 billion, with a total shipment value of $7.5 billion expected for the entire year of 2024.

It is noteworthy that Apple's South Korean competitor Samsung (SSNLF.US) is not troubled by this tax law. This is because nearly all of Samsung's phones in India are produced by its own factories, eliminating the issue of "equipment ownership belonging to contract manufacturers."

The Indian Cellular and Electronics Association (ICEA), which supports Apple, has submitted confidential documents to the government calling for amendments to relevant regulations. The association stated in the documents that "tax certainty is crucial for businesses to scale up and achieve growth."

ICEA did not mention specific company names in the documents but clearly stated: "Traditional contract manufacturers do not have the capability or willingness to invest such a large amount in specialized equipment, which can cost billions of dollars. In some cases, the equipment may even be provided for free by the brand owner."