Tax dispute puts its $1.5 billion investment in India at risk, says Volkswagen
Volkswagen’s Indian subsidiary, Skoda Auto Volkswagen India, which is contesting a $1.4 billion tax claim by local authorities, said on Monday that the dispute threatens its $1.5 billion investment in the country and could undermine the broader foreign investment climate in India.
The German car maker has filed a lawsuit against the Indian authorities, seeking to quash the “impossibly enormous” $1.4 billion tax demand, which it argues contradicts India’s import taxation rules for car parts, Reuters reported. The case is scheduled to be heard by the High Court in Mumbai on 5 February.
The tax notice, issued in September 2024, represents the largest import-related tax demand in Indian history. The authorities allege that Volkswagen imported almost complete vehicles in an unassembled state, a practice that typically attracts a 30-35% tax rate on completely knocked down (CKD) units. However, the company is accused of misclassifying these imports as individual parts, which would be subject to a much lower tax rate of 5-15%.
Volkswagen disputes the charge, asserting that it informed the Indian government about its “part-by-part import” strategy and received clarifications in support of this approach as far back as 2011. The company’s legal filing argues that the tax demand is a sudden and unjustified reversal of the government’s previous stance, undermining the trust foreign investors place in India’s policy stability and "ease of doing business" reforms.
In its defence, Volkswagen maintains that it did not import car parts as a single "kit" a scenario which would justify the higher tax rate but instead imported components separately, integrating them with locally sourced parts during the assembly process. The company likened this process to purchasing a chair online, which arrives in multiple shipments, each containing different parts, rather than as a single, pre-packaged unit.
Indian authorities, however, allege that Volkswagen used internal software to place bulk orders for vehicles, which were then broken down into 700-1,500 components per vehicle to circumvent higher duties. Volkswagen denies any misuse of the software, asserting that it simply helps track consumer demand at a macro level and facilitates dealer orders.
The tax dispute has far-reaching implications for Volkswagen, as the potential penalties could see the total amount payable rise to an eye-watering $2.8 billion, a sum that dwarfs the company’s sales of $2.19 billion and net profit of $11 million in India for the 2023-24 fiscal year.
If Volkswagen loses the case, it could have a chilling effect on foreign businesses in India, especially given the current climate of high taxes and ongoing legal disputes. The company has stated that the tax notice "deals a body blow" to India’s efforts to position itself as an attractive destination for foreign investment.
With the court hearing scheduled to begin on 5 February, all eyes are on the outcome of this high-stakes legal battle.