The Indian government has strongly opposed Volkswagen’s plea to quash a $1.4 billion tax demand, warning of “catastrophic consequences” if the automaker’s request is granted. The government’s stance, outlined in court documents, suggests that siding with Volkswagen could encourage companies to withhold information and delay investigations.
The case, the largest-ever back tax claim related to import duties in India, stems from a 12-year review of Volkswagen’s shipments. It has reignited concerns among foreign investors about prolonged tax investigations in the country. Volkswagen has described the dispute as a “matter of life and death” for its business operations in India and is contesting the tax demand in Mumbai’s high court.
Allegations of Misclassification
Volkswagen’s Indian subsidiary, Skoda Auto Volkswagen India, faces accusations of misclassifying imported components for Audi, Volkswagen, and Skoda vehicles to evade higher tariffs. The company argues that delays in shipment reviews were due to the “inaction and tardiness” of Indian tax officials.
However, in a detailed 78-page rebuttal filed on March 10, the Indian tax authority countered that Volkswagen itself was responsible for the delays. According to the filing, the automaker allegedly withheld critical data about its imports, making it difficult for authorities to conduct timely investigations. Accepting Volkswagen’s defense, the tax authority argued, would allow other importers to suppress vital information and later claim that the statutory time limit for investigations had expired.
The high court is scheduled to hear the case on Monday. Neither Volkswagen nor the Indian government has responded to requests for comments on the matter.
Potential Impact on Volkswagen and Foreign Investment
Volkswagen holds a relatively small share of India’s auto market, which is the third-largest globally. Its luxury Audi brand trails behind competitors such as Mercedes-Benz and BMW. If found guilty, the company could face a total financial liability of up to $2.8 billion, including penalties and interest on delayed payments.
The dispute comes at a time when Prime Minister Narendra Modi’s administration is actively courting foreign investment by promising simpler regulations and reducing bureaucratic obstacles. However, lengthy tax investigations that result in prolonged legal battles remain a significant concern for international businesses operating in India.
Volkswagen has argued that had the Indian authorities concluded their review sooner, it could have contested the findings or adjusted its import strategy. The tax demand issued in September 2024, the company claims, jeopardizes the “foundation of faith and trust” that foreign investors seek in India’s regulatory environment.
Government’s Stand on the Case
In its latest court filing, the Indian tax department asserted that Volkswagen only provided essential shipment review documents “in tranches,” delaying the investigation process. The government has urged the court to direct Volkswagen to engage with tax authorities rather than seeking judicial intervention.
The tax authority further alleges that Volkswagen systematically imported auto parts in separate shipments to avoid detection and reduce taxes, rather than declaring them as “completely knocked down” (CKD) units, which are subject to higher tariffs of 30%-35%, compared to the 5%-15% tax rate on auto parts.
The outcome of the case will be closely watched by foreign investors and businesses, as it could have significant implications for taxation policies and regulatory scrutiny in India.
