On November 1, Nokia’s Chennai manufacturing facility, was finally shut down following the termination of the mobile purchasing agreement from Microsoft (NASDAQ: MSFT) . With no vendor to cater to and the Indian government freezing Nokia’s assets following legal issues, Nokia decided to shutdown the plant and lay off the 8,000 full-time staff at the facility.

In its heyday, the plant accounted for over 60% of Nokia’s global handset production, with the vendor exporting devices produced at the location to Middle East and Africa, Asia, Australia and New Zealand. While the facility itself was originally meant to be included in the $7.2 billion sale to Microsoft, the legal issues from the Indian government prevented the transfer of the plant once the deal was finalized earlier this year. Nokia then entered into an agreement to manufacture phones for Microsoft from the facility, but that agreement come to an end on October 31 and was not renewed.

Legal issues

The setbacks began when the Indian government discovered that Nokia was selling handsets produced at the Chennai facility in the domestic market. The factory was categorized solely for exports, which entitled a host of benefits from the state government including a free 99-year lease, power, tax, and electricity cost reimbursements as well as other write-offs. The Tamil Nadu government facilitated these measures to grow local manufacturing and drive jobs in this segment, and it succeeded as the facility at full output had a workforce of 12,000 full-time workers and 25,000 contractors.

Handsets that were being exported to other countries were exempt from Indian tax laws, but if a device were to go on sale in India, it would incur additional taxes in line with the local tax rules. It was found that Nokia’s Indian subsidiary was not conforming to the local tax laws when selling handsets in the country, which led to a fine of $352 million from the Delhi High Court for the six-year period from 2006 to 2013. An asset freeze followed, but was soon revoked to allow the sale of the facility to Microsoft. That fell through as it meant that Microsoft had to pay the government Nokia’s back taxes. The tax issue is still being debated by Nokia, which claims that it is far lesser than $350 million. Over-complicated tax laws are said to be another factor in deciding the actual amount that is owed by the Finnish giant.

Nokia is looking to renew its factory license so that it can sell the 200-acre facility as a fully functional electronics factory to future buyers. The manufacturer has until the end of the month to renew its license, and failing to do so would reduce the facility to nothing more than a warehouse.

A setback for India

Whatever the verdict comes out to, it is clear that the closure of the Chennai plant is a major setback to the manufacturing segment in India. Prime Minister Narendra Modi is actively promoting a “Made in India” campaign to bring hardware manufacturing to the country, but primitive custom laws and lack of skilled workers are major hurdles for prospective vendors looking to set up shop here.

IBM (NYSE: IBM) was in discussions with the Indian government to set up a fab in India, but the move fell through. The Indian government is keen on foreign investments and is ready to provide lucrative deals, but the lack of infrastructure seems to be the biggest drawback. Local manufacturers like Micromax and Karbonn are beginning to understand the value of local manufacturing, but Xiaomi looks likely to create a facility in the country before the local vendors. According to a statement from last month, Xiaomi is currently estimating the viability of a manufacturing facility in India.

It may be a while before we see any real progress in this segment, but the longer-time prospects do seem encouraging considering the rising labor costs in China. With manufacturers like Foxconn (TPE:2354) now looking to countries like Indonesia and beyond for production, India is a likely candidate. The country has manual labor in abundance, and the government is keen on offering lucrative deals for foreign entities. However, to avoid setbacks like the one brought about by Nokia, the government needs to be clear in establishing clear-cut laws and communicating these laws to vendors setting up a base here.