Apple is facing a problem in India that could prove costly. The company wants to significantly expand its iPhone production in the country, but is facing a potential tax obstacle. New assembly facilities could be considered a business connection under Indian law—making Apple's global iPhone profits taxable. This would cost the company billions and could impact its production strategy in Asia.
India has long been more than just a market for Apple. The company is increasingly relying on local manufacturing there to reduce its dependence on China. Around 25 percent of all iPhones are now assembled in India. With the planned expansion of this production, Apple is pursuing the goal of becoming even more independent and flexible in the future. However, the country's tax regulations could now pose a major obstacle.
Apple's production model in India
Assembling iPhones is technically complex. It requires specialized machinery that is precise and expensive. In many cases, Apple's manufacturing partners, such as Foxconn or Tata, purchase this equipment. However, if production is planned to increase, more or more modern machines are often required – and this is where Apple usually intervenes itself.
In China, Apple pays for such machines directly, installs them in its partners' factories, and retains ownership. This model has proven successful because it gives the company full control over quality and production processes. Apple wants to take the same approach in India. But that could now pose a problem.
Tax risks for Apple
Under Indian income tax law, the ownership of such machines by a foreign company can be considered a "business connection." This means that India would have the right to access profits generated by these machines—even if they only account for a portion of global iPhone production.
According to a Reuters report , this could make Apple liable for taxes in India, resulting in billions of dollars in tax burdens. A senior government official confirmed that profits from iPhones manufactured using these Apple-owned machines could be tax-relevant. Tax expert Riaz Thingna of Grant Thornton Bharat LLP explained that global sales could theoretically be used as the basis for calculating taxable income.
This would mean that not only the devices sold in India would be affected, but also a portion of the iPhone's international profits. For Apple, this would be a massive cost factor, which could make the planned expansion of Indian production significantly less attractive.
The Indian government's dilemma
The situation is complicated for the Indian government. On the one hand, it wants to keep Apple in the country and continue to promote the expansion of production. Every new factory creates jobs, strengthens the local economy, and signals to international investors that India is a reliable manufacturing location.
On the other hand, the government wants to ensure that companies that create value in India also pay taxes. An overly generous exemption for Apple could create the impression that large corporations are receiving preferential treatment. Overly strict rules, in turn, could have a deterrent effect and jeopardize future investments.
Apple is currently actively advocating for tax laws to be amended or clarified so as not to hinder investment. The company argues that while the machines are physically located in India, control and use are entirely from the United States. This, it argues, should not create a taxable nexus.
Impact on Apple's strategy
The potential tax liability could have far-reaching consequences. If India actually insists on the current regulation, Apple would have to rethink its production strategy. The company would either have to accept higher costs or develop alternative models with local partners where the machines do not remain directly owned by Apple.
In China, the current model worked well because no comparable tax classification exists there. India, on the other hand, wants to use its tax policy to secure its own revenue. This puts a lot at stake for Apple—not only financially, but also in terms of confidence in the stability of its production sites outside of China.
Between growth and tax burden: Apple's balancing act in India
Apple's plans to further expand iPhone production in India have encountered a legal obstacle that could jeopardize the entire model. The tax classification of the production facilities will determine whether the company will have to pay billions in taxes in the future. India is faced with a balancing act: On the one hand, the expansion of production must be accelerated, while on the other hand, the country's tax base must not be undermined. For Apple, it is clear that the future of iPhone production lies in India – but only if the tax uncertainty can be resolved. Until then, it remains to be seen whether the expansion of the assembly facilities will actually proceed as quickly as originally planned. (Image: Shutterstock / Ringo Chiu)
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