Volkswagen Sues Indian Authorities Over $1.4 Billion Tax Demand

By Aditya Kalra, Arpan Chaturvedi and Aditi Shah

NEW DELHI (Reuters) – Volkswagen has filed a lawsuit against Indian authorities to quash an “impossibly enormous” tax demand of $1.4 billion, claiming this demand contradicts New Delhi’s import taxation rules for car parts and threatens the company’s business plans, as detailed in court papers.

Volkswagen’s unit, Skoda Auto Volkswagen India, contended in a filing to the High Court in Mumbai that this tax dispute jeopardizes its $1.5 billion investments in India and adversely affects the foreign investment climate. The 105-page document, though not publicly available, was reviewed by Reuters.

In what is the largest import tax demand on record, India levied a $1.4 billion tax notice on Volkswagen in September. Authorities alleged Volkswagen utilized a strategy to break down imports of VW, Skoda, and Audi cars into numerous individual parts to avoid paying higher duties. Allegedly, Volkswagen imported “almost the entire” car in an unassembled state, which typically incurs a tax of 30-35% for completely knocked down (CKD) units, but paid a lower levy of 5-15% by misclassifying those parts as individual components shipped separately.

Volkswagen India maintained that it had kept the Indian government updated about its “part-by-part import” model and received significant clarifications in support of this approach back in 2011. The company’s court filing argues the tax notice is “in complete contradiction” to previous government positions and undermines foreign investors’ trust in the administration’s assurances.

The Indian finance ministry and the customs officials responsible for the demand did not respond to inquiries outside regular business hours.

The company emphasized its commitment to using all legal remedies while cooperating with authorities to ensure complete compliance with both global and local laws. A Volkswagen spokesperson in Germany did not respond to requests for comment.

Volkswagen holds a minor position in India’s annual car market, which totals 4 million units – the world’s third largest. Within the luxury segment, its Audi brand struggles to compete against rival brands like Mercedes and BMW.

A government source previously indicated that penalties could raise Volkswagen India’s financial obligations to $2.8 billion should it lose this dispute. For the fiscal year 2023-24, VW India reported sales of $2.19 billion and a net profit of $11 million.

This tax dispute arises as Volkswagen seeks to reduce costs to better compete with Chinese rivals and address weak demand in Europe. The company announced plans to cut 35,000 jobs in Germany in December and mentioned plans to sell some operations in its largest market, China.

‘BODY BLOW’ FOR INVESTOR SENTIMENT

Volkswagen argued it is not liable for higher taxes since it did not import car parts as a single “kit” but instead shipped them separately, combining them with some local components to assemble a car. The company provided an analogy of purchasing a chair online, where all necessary parts for assembly arrive in one shipment.

Authorities, however, alleged that Volkswagen’s local unit regularly placed bulk orders for cars through internal software that connected it to suppliers in countries like the Czech Republic, Germany, and Mexico. After the orders, the software broke them down into main components, totaling around 700-1,500 parts per vehicle, which were then shipped separately over time. Authorities dubbed this a “ploy to clear the goods without payment of the applicable duty.”

Volkswagen disputed the claim of clandestine software use, stating that it merely assists dealers in managing customer orders and tracking demand on a larger scale.

High taxes and extended legal disputes have been persistent issues for foreign companies in India, with Tesla also expressing concerns over high import taxes for electric vehicles. Volkswagen claimed the tax notice represents a significant setback to the supposed “ease of doing business” policy that India has promoted for foreign investors.

The Mumbai High Court is scheduled to commence hearings on this case on February 5.