Volkswagen Sues Indian Authorities For Over $1.4 Bn Tax Demand: Report

Volkswagen has filed a lawsuit against Indian authorities to challenge a USD 1.4 billion tax demand, calling it “impossibly enormous” and contradictory to the country’s import taxation rules for car parts

Volkswagen has filed a lawsuit against Indian authorities to challenge a USD 1.4 billion tax demand, calling it “impossibly enormous” and contradictory to the country’s import taxation rules for car parts. In a 105-page petition reviewed by Reuters, the German automaker’s Indian unit, Skoda Auto Volkswagen India, argued before the High Court in Mumbai that the tax dispute jeopardizes its USD 1.5 billion investment in India and could harm the broader foreign investment climate. 

The tax notice, issued in September, is the largest ever import-related tax demand in India and accuses Volkswagen of manipulating import classifications to reduce duties. Volkswagen’s legal filing asserts that the tax demand undermines India’s much-publicised efforts to create an investor-friendly environment and ease of doing business. The High Court in Mumbai is scheduled to begin hearing the case on 5 February.

According to Indian authorities, Volkswagen imported nearly entire vehicles in an unassembled state, which typically attracts a 30-35 per cent tax applicable on completely knocked down (CKD) units. However, the company allegedly evaded these higher duties by classifying the imports as separate individual parts, subject to a lower tax rate of 5-15 per cent. 

Volkswagen contends that it had kept the government informed about its “part-by-part import” strategy and even obtained clarifications supporting its approach in 2011. The company’s court filing argues that the sudden reversal in the government’s stance undermines investor trust and contradicts the principles of policy stability that foreign businesses rely upon.

In its defense, Volkswagen insists that it did not import car components as a single “kit,” which would justify higher taxes, but rather brought in parts separately and integrated them with locally sourced components during assembly. The company likened the situation to purchasing a chair online, which arrives as a single shipment containing all necessary parts—a scenario Volkswagen claims does not apply to its operations in India. 

Authorities, however, allege that Volkswagen used internal software to place bulk car orders, subsequently breaking them down into 700 to 1,500 components per vehicle to sidestep higher duties. The company denies any misuse of the software, claiming it merely facilitates dealer orders and tracks consumer demand trends.

If Volkswagen loses the case, the total amount payable, including penalties, could rise to USD 2.8 billion, a staggering figure compared to the company’s reported sales of USD 2.19 billion and net profit of USD 11 million in India for the 2023-24 fiscal year. 

(This report is based on information reviewed by Reuters)

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