Volkswagen is suing Indian authorities for demanding a $1.4 billion tax, the highest tax demand ever. The company brought up the issue of India’s import tax regulations. The dispute started with a tax evasion notice to Volkswagen, alleging the automobile company imported almost complete cars in unassembled form, showing them as individual parts.
Background of the Tax Dispute
The highest-ever import tax was filed by the Indian authorities against Volkswagen in September. Not only Volkswagen, but also other automobile companies, Skoda and Audi, import disassembled parts to India.
The German automobile manufacturer strategically disassembled the nearly ready cars and imported them as individual parts, which are subjected to a 30-35% taxation on completely built units (CBU). The company has been importing these nearly ready cars at the lower import rates by misclassifying them as completely knocked down units (CKD), which are taxed at rates of 5-15% as individual parts.
Volkswagen’s Defense
Volkswagen defends itself by claiming that the company did not import the car parts together as one kit. Instead, the company ships the car parts separately, which local manufacturers then combine to form a vehicle. India has been importing from Volkswagen since 2011. This action also undermines the confidence of foreign investors in the tax administrative functions of India.
Potential Implications
If Volkswagen loses the case against Indian authorities, they may face a total liability of approximately $2.8 billion, including penalties. In the fiscal year 2023-24, Volkswagen India generated sales of approximately $2.19 billion, resulting in a net profit of $11 million from the Indian market.
The tax dispute has come at a time when the demands in Europe are low, and they are trying to cut costs to compete with the Chinese rivals in the automobile industry. Further, in December, the company announced over 35,000 job cuts in Germany.
The high court has scheduled a hearing for February 5th. The results of the legal battle will further have significant implications for Volkswagen and its operations in India.
