Volkswagen sues India to quash $1.4 billion tax demand: report

German automaker Volkswagen has filed a lawsuit in the Bombay high court seeking to dismiss a $1.4 billion tax demand issued by Indian authorities, Reuters reported on Sunday.

The company reportedly called the tax claim “impossibly enormous” and contradictory to the country’s import tax regulations.

Last September, Indian tax authorities had sent a notice to the company’s local unit, Skoda Auto Volkswagen India, alleging that Volkswagen misclassified its imports to reduce customs duties.

According to the tax department, the company imported nearly complete vehicles in an unassembled condition but categorized them as separate components to pay lower taxes.

Under Indian regulations, completely knocked down (CKD) units attract a higher import tax rate of 30-35%, while individual car parts are taxed at a lower 5-15% rate.

Authorities claim Volkswagen’s strategy allowed it to evade significant tax payments.

In a court filing on 29 January, Volkswagen denied wrongdoing, saying the tax notice is “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.”

According to the company, it informed officials in 2011 about its “part-by-part import” method, and received official clarifications supporting this approach, Reuters reported.

The company maintains that it did not import car parts as a single “kit” but shipped them separately and incorporated local components in its manufacturing process.

The automaker also warned that tax claim could hamper its $1.5 billion investments in India, adversely affecting the country’s foreign investment climate.

Volkswagen’s India unit reportedly confirmed that it is pursuing all legal options while co-operating with authorities to ensure compliance with local and global laws.

Meanwhile, according to government officials, Volkswagen used internal software to place bulk orders for vehicles from suppliers in the Czech Republic, Germany, and Mexico, among other countries.

The software allegedly broke down the orders into main components, ranging from 700 to 1,500 parts per vehicle.

These parts were then shipped separately over time.

Authorities called this “a ploy to clear the goods without the payment of the applicable duty.”

Countering this allegation, Volkswagen said the software only helps track consumer demand and manage dealer orders. The company contends there was no “exclusive utilization of the parts towards manufacture of one specific car.”

If Volkswagen loses the case, the total tax and penalty amount could reach $2.8 billion, the Reuters report said, citing an unidentified government official. This would be significantly higher than Volkswagen India’s reported annual sales of $2.19 billion (Rs18,100 crore) in fiscal 2024, during which it posted a net profit of only $11 million.

The Bombay high court is scheduled to hear the case on 5 February.