India has issued a formal notice to German automaker Volkswagen, accusing it of evading taxes worth $1.4 billion. The company allegedly misclassified components imported for its Audi, VW, and Skoda models, thereby paying significantly lower import taxes than required. According to a document dated September 30, Volkswagen’s Indian subsidiary, Skoda Auto Volkswagen India, imported nearly complete car units under the guise of individual parts, thereby evading higher import taxes.
Misclassification of Components
Volkswagen imported “almost the entire” car in an unassembled condition, a practice that would typically attract a 30-35% import tax under India’s regulations for Completely Knocked Down (CKD) units. However, the company allegedly mis-declared and misclassified the shipments as individual parts, which were subject to lower duties of just 5-15%. This strategy was used for models like the Skoda Superb and Kodiaq, Audi A4 and Q5, and VW Tiguan. The notice claims the company deliberately avoided higher duties by splitting shipments into multiple consignments, thus evading detection.
Government’s Findings and Volkswagen’s Response
Indian investigators have accused Volkswagen of engaging in “artificial” logistical arrangements designed to evade the payment of applicable duties. A 95-page notice from the Office of the Commissioner of Customs in Maharashtra, which was reviewed by Reuters, lays out these findings. The notice demands a response from Volkswagen within 30 days, although the company has not yet commented on whether it has complied. In its statement, Skoda Auto Volkswagen India asserted its commitment to local and international laws and promised full cooperation with the authorities.
Significant Financial Shortfall
Since 2012, Volkswagen’s India unit has reportedly paid only $981 million in taxes on imports, a significant shortfall from the $2.35 billion it should have paid, leaving a gap of $1.36 billion. If found guilty, the company could face penalties that could double the total amount owed, bringing the potential fine to $2.8 billion.
A Concerning Development for Volkswagen
The tax investigation adds to a series of challenges Volkswagen is facing, both in India and globally. The company is currently in a dispute with labor unions in Germany over plant closures and layoffs, while also dealing with increasing competition from Chinese automakers. In India, Volkswagen has struggled to increase its market share in the highly competitive car industry, where its luxury Audi brand lags behind rivals like Mercedes-Benz and BMW.
As part of the investigation, Indian authorities conducted searches at three Volkswagen India facilities in 2022. The authorities seized documents related to component imports and email backups from senior executives. The company’s India Managing Director, Piyush Arora, was questioned about why parts were not shipped together in a single consignment but failed to provide a satisfactory explanation.
The Indian notice outlines how Volkswagen used internal software to place bulk orders for parts from suppliers in countries such as the Czech Republic, Germany, and Mexico. These parts were shipped separately across multiple invoices, arriving at Indian ports almost simultaneously. Investigators argue this was done to reduce the duties paid on individual parts, a practice they claim was intended to mislead customs authorities. While Volkswagen defended this as a matter of operational efficiency, the argument was dismissed by Indian authorities, who emphasized that the company’s actions appeared to be deliberate and not in good faith.
Volkswagen continues to invest in the Indian market, with plans to invest $1.8 billion in the production of electric vehicles and hybrids in Maharashtra. Despite these efforts, the company remains a small player in India’s 4 million-unit car market, and this tax dispute could further complicate its position in the country. In the luxury segment, Volkswagen’s Audi brand faces stiff competition, particularly from established names like Mercedes-Benz and BMW.
The allegations against Volkswagen highlight ongoing challenges for foreign companies operating in India, where high taxes and legal disputes have often caused friction. For now, Volkswagen must respond to the Indian government’s notice, and the outcome of this case could have significant financial implications for the automaker.
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