Volkswagen India unit gets tax evasion notice, has to pay $1.4 billion in dues: Report

According to a Reuters report, the notice by the Office of the Commissioner of Customs in Maharashtra, Volkswagen allegedly used to import "almost the entire" car in unassembled condition which involves a 30-35 per cent import tax in India under the rules for CKD or completely knocked-down units.

Also read: Tesla unlikely to come to India anytime soon

Tax evasion 'ploy'

However, Indian investigations found that the German car manufacturer allegedly used the "ploy" of avoiding paying levies by "mis-declaring and misclassifying" those imports as "individual parts," and ended up paying merely just a 5-15 per cent duty.

Volkswagen’s India unit, known as the Skoda Auto Volkswagen India, was in this manner “wilfully evading paying the taxes”, the notice said.

The company imported for its models like the Skoda Superb and Kodiaq, luxury cars like Audi A4 and Q5, and VW's Tiguan SUV.

According to the notice, since 2012 Volkswagen’s India unit notched up import taxes and several other related levies to the tune of about $2.35 billion but paid only $981 million. So, there is a shortfall of $1.36 billion yet to be paid to the Indian government.

In the notice, the government authority asked Volkswagen's local unit to explain why this alleged tax evasion should not attract penalties and interests under Indian laws. This would be above the $1.4 billion evaded duties.

Also read: Skoda Auto Volkswgen India exports over 25000 cars in current year so far

India's high taxes on imported cars

India's high taxes on imported cars have been a sore point of contention with foreign companies in India. Elon Musk has raised this issue time and again in connection with Tesla entering India.

Chinese automaker BYD is also having to deal with an ongoing Indian tax investigation for underpaying taxes of roughly $9 million on imports.

The report pointed out that this tax evasion notice may cause more problems for a small player like Volkswagen in India's car market. Its Audi brand is already falling behind competitors like Mercedes and BMW.

Notably, the notice mentioned that Mercedes was adhering to the rules and forking out a 30 per cent tax by importing the CKD units of their cars, and did not separate the imported vehicle in ndividual parts.

How this operation worked?

The Indian notice detailed the modus operandi pursued by the company. The report said that after Indian investigators conducted a probe of the company's internal software they found that Volkswagen India regularly placed bulk orders for cars with suppliers in Czech Republic, Mexico, Germany and other nations.

The software then broke down the car into roughly 700-1500 "main components/parts" for each vehicle depending on the model. 

The supplies of car parts were packed in different containers within three to seven consecutive days. Multiple invoices were made out for them and the supplies reached the Indian port roughly at the same time, Indian authorities alleged.

"This appears to have been done to pay lesser duties applicable on these individual parts," the notice said.

Volkswagen statement

In its defense Volkswagen has told investigators that this route was adopted to make their operations "efficient" but the Indian authorities have dismissed the argument.

Meanwhile, in a statement, Skoda Auto Volkswagen India said it is a “responsible organisation, fully complying with all global and local laws and regulations”.

They said they re analyzing the notice and will extend their full cooperation to the authorities. According to the report, it is not clear if the company had responded to the notice, which was dated September 30, within 30 days.