Volkswagen sues Indian tax authorities over $1.4 billion demand: What’s the case about?

The company has reportedly argued that the tax demand is contradictory to the government’s import taxation rules for car parts and will hamper the company’s business plans in India, reported Reuters.

Volkswagen’s unit, Skoda Auto Volkswagen India, also told the court that the tax dispute puts at risk its investments of $1.5 billion in India and is detrimental to the foreign investment climate, according to the 105-page filing which is not public.

In September last year, the Indian government slapped a $1.4 billion tax notice on Volkswagen for using a strategy to break down imports of some VW, Skoda and Audi cars into many individual parts to pay lower taxes.

The Indian authorities had alleged that the company imported their cars in unassembled condition or completely knocked down (CKD) units. However, they mis-classified them as “individual parts”, thus evading taxes.

CKDs attract a tax of 30-35 percent as opposed to parts that attract a 5-15 percent levy.

The case was filed on January 29. It said the notice hurt the faith of foreign investors.

Also read: Volkswagen India gets $1.4 billion tax evasion notice by Centre: Report

“The 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,” it reads.

Volkswagen’s India unit said in a statement it is using all legal remedies as it cooperates with authorities and remains committed to ensuring “full compliance” with all global and local laws.

Also read: Shuttered plants and job cuts: Why Volkswagen is driving down dangerous path

What’s Volkswagen’s argument?

The company says it is not liable to pay higher taxes as it did not import car parts together as a single “kit”, but instead shipped them separately. It also argued that it also used local components to make its cars in India.

The authorities, however, alleged Volkswagen’s local unit regularly placed bulk orders for cars through internal software which connected it to suppliers in the Czech Republic, Germany, Mexico and other nations. And after the order was placed, the software broke it down into “main components/parts”, roughly 700-1,500 for each vehicle depending on the model, which were shipped separately over time.

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

The company, however, said in the filing that there was no “exclusive utilization of the parts towards manufacture of one specific car.”

Volkswagen India also contests the alleged clandestine software use, arguing it only helps dealers convey car orders so that it can track “consumer demand at a macro level”.

The Bombay high court will hear the case on February 5, Reuters reported.