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Nokia’s long-running tax dispute with the Indian authorities appeared to take another turn after it was revealed that it sent the commerce ministry a strongly-worded letter branding India its “least favourable market” and threatening to move production to China.

Written in June, the letter said that the “political risk” of operating in India had become “substantially higher” thanks to recent tax claims lodged by the government, according to the Indian Express.

In March, the finance ministry made a retroactive income tax demand of Rs 2,080 crore (£204m) which Nokia believes violates a bilateral treaty between the two under which Nokia’s software business is to be taxed in Finland rather than India.

The letter apparently went on to warn that such moves may “inevitably influence future decisions to develop one's operations in India”.

The mobile giant is also not happy that the regional Tamil Nadu government has refused to honour a promise to hand over 10 years’ worth of VAT refunds in exchange for Nokia setting up operations in the Sriperumbudur Special Economic Zone.

This withholding of money has made it “more cost efficient for Nokia to have transferred the manufacture of mobile phones to China and to import them to Indian market rather than manufacture them in Chennai”, the letter apparently noted.

Nokia’s Chennai handset plant is the company’s largest globally, employing over 8,000 workers, so the firm would seem to have some leverage over a government keen to avoid any big name foreign investors pulling out of the country.

Vodafone, Google and LG, amongst others, have all been hit with big bills which have strained relations in recent months.

However, in a statement emailed to The Reg, Nokia was keen to play down any problems with the state.

It said that it's still committed to India, adding the following:

Nokia can confirm that it has been in discussions with the Central Government and State Government over ways to bring greater clarity to the business environment in India. These discussions have been both constructive and productive, and both sides have worked in a true spirit of cooperation. Evidence of this is the Tamil Nadu government’s recent issuing of a Government Order to us.

The Chennai plant would remain a key part of its global manufacturing strategy, it added.

For so long a global growth engine when it comes to the technology industry, India is currently suffering a mini-economic crisis which has seen the rupee drop to record lows against the dollar.

However, analysts The Reg spoke to argued that the country’s IT giants could actually use the weak rupee to their advantage in boosting profits thanks to the large percentage of income they make overseas. ®

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