Volkswagen sues Indian govt over $1.4 billion tax demand | Details

Volkswagen has filed a lawsuit against Indian authorities to challenge a $1.4 billion tax demand, claiming it's inconsistent with import tax rules.

Volkswagen has sued Indian authorities to quash what it calls, an "impossibly enormous" tax demand of $1.4 billion, news agency Reuters reported. The German automaker's Indian unit, Skoda Auto Volkswagen India, said the tax demand is contradictory to India's import tax rules for car parts and thus will put to risk its investment of $1.5 billion in the country, the report added, citing a 105-page Mumbai high court filing dated January 29.

A Volkswagen logo is pictured at Volkswagen's headquarters in Wolfsburg, Germany. (Reuters)

The case was filed after India slapped a $1.4 billion tax notice on Volkswagen in September 2024, after the company used a strategy to break down the imports of some VW, Skoda and Audi cars into many individual parts in order to pay a lower duty, Reuters reported.

Indian authorities then alleged that Volkswagen imported "almost the entire" car in an unassembled condition.

This is supposed to have attracted a 30-35% tax applicable on completely knocked down units (CKDs).

However, Volkswagen classified them as "individual parts" coming in separate shipments. This allowed them to pay just a 5-15% tax.

Volkswagen also claimed that it had kept the government informed of this "part-by-part import" model and received clarification supporting this in 2011. The report quoted the company as saying it in its court filing.

It then went on to say that the new tax notice is "in complete contradiction of the position held by the government ... (and) places at peril the very foundation of faith and trust that foreign investors would desire to have in the actions and assurances" of the administration.

Volkswagen's primary argument is that it did not import car parts together as a single "kit", but shipped them separately, combining them with some local components to make an entire car.

However, Indian authorities alleged Volkswagen's local unit regularly placed bulk orders for cars through an internal software which connected it to suppliers in Czech Republic, Germany, Mexico and other nations, according to the report

After such orders were placed, the software broke it down into “main components/parts,” around 700-1,500 for each vehicle depending on the model. These were shipped separately over time.

Indian authorities said this was “a ploy to clear the goods without the payment of the applicable duty.”

Volkswagen may have to pay $2.8 billion in total including penalties if it loses the case, according to the report. This is more than its entire sales in India in 2023-24, which was $2.19 billion. Its net profit at that time was $11 million.

The tax dispute comes at a time when the automaker is looking to cut costs to compete with Chinese rivals and deal with weak demand in Europe.

The Mumbai High Court will start hearing the case on February 5, 2025.