India warns canceling VW’s Rs. 11,620 crore tax bill could set a dangerous precedent
India’s federal tax authorities have issued a strong rebuttal in an ongoing legal battle with Volkswagen, warning that cancelling a $1.4 billion (Rs. 11,620 crore) tax demand could set a troubling precedent and disrupt future investigations. The dispute, currently before the Bombay High Court, revolves around import duty claims against Skoda Auto Volkswagen India, the local arm of the German auto group.
The controversy stems from a comprehensive review of Volkswagen’s imports over a 12-year period, which tax officials allege involved misclassification of components for Volkswagen, Skoda and Audi vehicles. By not declaring the shipments as completely knocked down units, which attract significantly higher duties, the company is said to have benefited from lower tariff rates applied to individual auto parts.
Volkswagen has challenged the tax claim, arguing that delays in the government’s investigation were due to administrative inefficiencies and lack of timely scrutiny. In court filings, the automaker has described the case as critical to the future of its operations in India, calling it a “matter of life and death” for its business in the country.
However, in a 78-page submission dated March 10, the Directorate of Revenue Intelligence (DRI) refuted this claim, asserting that it was Volkswagen’s own delays in providing complete documentation that hampered the investigation. According to the DRI, the company released crucial information in phases, which slowed the review process and undermined enforcement timelines.
The government warned the court that accepting Volkswagen’s position could encourage other importers to withhold information and subsequently claim immunity on procedural grounds, jeopardising the integrity of the tax system. Such a move, it argued, could have “catastrophic consequences” for regulatory enforcement in the future.
The case, set for hearing on Monday, marks one of the largest back-tax claims in India’s automotive sector. If penalties and interest are added, Volkswagen’s total liability could climb to $2.8 billion (Rs. 23,240 crores).
This legal battle also casts a spotlight on India’s broader investment climate. While Prime Minister’s administration has actively promoted the country as a destination for foreign investment—promising streamlined regulations and reduced red tape—lengthy tax inquiries and legal uncertainty remain a concern for global firms.
Volkswagen maintains that if the government had completed its probe in a timely manner, the company would have had the opportunity to adjust its import processes or contest the findings earlier. The September 2024 tax notice, it argues, undermines investor confidence and signals regulatory unpredictability.
In its latest filing, the Indian tax authority urged the court to direct Volkswagen to respond formally to the tax notice and engage with the department through the prescribed channels, rather than relying solely on judicial intervention.
Both Volkswagen and Indian government officials have yet to issue public comments on the matter.
As the legal proceedings unfold, the outcome is expected to have wider implications for how multinationals navigate India’s complex tax environment—especially in sectors involving high-value imports and manufacturing strategies.
