Volkswagen’s Indian subsidiary, Skoda Auto Volkswagen India, has filed a legal challenge against a $1.4 billion import tax demand issued by Indian authorities. The company argues that the demand contradicts existing import taxation rules for car parts and poses a threat to its investment plans in the country. The case, filed in the High Court of Mumbai, highlights ongoing tensions between foreign investors and India’s regulatory framework.
Allegations of Tax Evasion
The Indian government issued the tax notice in September 2024, accusing Volkswagen of evading import duties by misclassifying car components. Authorities claim that the company imported completely knocked down (CKD) units under the guise of individual parts, thereby paying lower duties of 5-15% instead of the 30-35% applicable to CKD imports.
According to the filing, Indian authorities believe that Volkswagen used internal software to strategically break down large orders into multiple components, allowing them to clear customs at lower tax rates. The tax notice, which could potentially increase to $2.8 billion with penalties, is reportedly the largest import tax demand ever issued in India.
Volkswagen’s Defence
Volkswagen contends that its “part-by-part” import model adheres to Indian laws and was clarified and approved by government authorities in 2011. The company emphasizes that components were imported separately, not as a complete kit, and combined with locally sourced parts.
As part of its defense, Volkswagen likened the situation to ordering a chair online, where receiving all parts in one shipment constitutes a kit. In contrast, Volkswagen maintains that its parts were shipped at different times and were not exclusively used to manufacture a single vehicle.
The automaker argues that the tax demand undermines investor trust and contradicts India’s efforts to promote ease of doing business and attract foreign investment.
Impact on Volkswagen and Business Environment
Volkswagen’s unit has invested $1.5 billion in India and reported $2.19 billion in sales for the 2023-24 fiscal year. However, the tax dispute could significantly impact its operations. The company is already facing financial challenges globally, including plans to cut 35,000 jobs in Germany and restructuring efforts to compete with Chinese automakers.
Volkswagen’s case also raises broader concerns for foreign investors. High taxes and lengthy legal disputes have been recurring issues for multinational companies in India. Tesla, for example, has voiced similar complaints about India’s high import duties on electric vehicles.
Volkswagen described the tax notice as a “body blow” to India’s efforts to promote ease of doing business and attract foreign investment.
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Legal Proceedings Set to Begin
The Mumbai High Court is scheduled to hear Volkswagen’s case on February 5, 2025. The company has stated that it will continue to pursue all legal remedies while maintaining its commitment to full compliance with Indian laws.
Indian authorities, including the finance ministry and customs department, have not commented on the case. A Volkswagen spokesperson in Germany also declined to provide a statement.
This high-profile legal battle underscores the challenges faced by global corporations navigating India’s complex tax and regulatory environment. The outcome could have implications for both Volkswagen’s long-term presence in India and broader foreign investment sentiment in the country.
