Volkswagen's India unit is facing serious allegations of tax evasion after being accused of underpaying import duties on car components by a staggering $1.4 billion. The accusation stems from a September 30 notice issued by India's Office of the Commissioner of Customs in Maharashtra, which claimed the automaker willfully misclassified imported car parts to evade higher tax rates.
According to the 95-page document, Volkswagen allegedly imported "almost the entire" car in an unassembled state, a condition that typically incurs a 30-35% import tax under Indian laws governing completely knocked-down (CKD) units. Instead, the company reportedly classified these imports as "individual parts," paying just 5-15% in duties. The investigation detailed how Volkswagen's Indian subsidiary, Skoda Auto Volkswagen India, used this approach to bring in components for models like the Skoda Superb, Audi A4, VW Tiguan, and other luxury vehicles. Authorities allege the company orchestrated shipments in separate consignments to avoid detection, amounting to what the notice described as an "artificial arrangement" aimed at avoiding proper duties.
Volkswagen responded with a statement asserting its compliance with global and local regulations, adding that it is reviewing the notice and cooperating with authorities. However, the company did not comment on whether it had formally responded to the allegations within the 30-day window outlined in the notice. Meanwhile, India's finance ministry and customs department have yet to issue a statement.
The tax demand includes the shortfall of $1.36 billion in duties owed since 2012, with authorities warning that penalties could double the liability to $2.8 billion if Volkswagen is found guilty. Such cases often become prolonged legal battles, as seen with other multinational companies like Tesla and Vodafone, which have also faced tax-related disputes in India.
The notice detailed Volkswagen's alleged modus operandi, claiming the company's internal software was used to place bulk orders for vehicle components from suppliers in Germany, Mexico, and the Czech Republic. These orders were broken down into smaller shipments packed and invoiced as separate items before arriving at Indian ports in close succession. Investigators stated this logistical arrangement was intended to reduce tax liability, describing it as a deliberate attempt to mislead customs authorities. Volkswagen reportedly argued this method was used to ensure operational efficiency, an explanation authorities dismissed as inadequate.
The controversy comes at a time when Volkswagen is seeking to expand its footprint in India. Earlier this year, the company announced plans to invest $1.8 billion in producing electric and hybrid vehicles in the region. Despite its aspirations, Volkswagen has struggled to gain a significant market share in India's competitive automotive landscape. This latest controversy could further complicate its efforts to establish a stronger presence.
The investigation included searches of three Volkswagen facilities in India in 2022, during which officials seized documents and executive emails. The company's India Managing Director, Piyush Arora, was questioned about why components required to assemble a vehicle were shipped separately, but the notice claims he was unable to provide a satisfactory answer.
Authorities have also cited other automakers like Mercedes-Benz as examples of compliance, noting that these companies follow CKD import rules and pay the requisite 30% tax. The alleged discrepancies in Volkswagen's operations have raised broader questions about how multinational corporations navigate India's tax environment.
Volkswagen's shares dropped over 2% on the Frankfurt Stock Exchange following the news, signaling global investor concerns over the potential financial fallout. While the company plans to contest the charges, the case underscores the challenges foreign firms face in India, where high taxes and complex regulations have long been cited as obstacles to doing business.
