Volkswagen Sues India Over US$1.4bn Tax Dispute

In an unprecedented legal move, German automotive giant Volkswagen has filed a lawsuit against Indian authorities, seeking to quash an "impossibly enormous" tax demand amounting to US$1.4bn. According to legal filings reviewed by Reuters, Volkswagen argues that the tax claim contradicts India's existing import taxation rules for car components and poses a significant threat to the company's business strategy in the country.
The core of the dispute
Volkswagen's Indian subsidiary, Skoda Auto Volkswagen India, has approached the Mumbai High Court, highlighting that the tax dispute jeopardizes its US$1.5bn investments in India. It expressed concerns that such a hefty demand could negatively impact India's reputation as a favourable destination for foreign investment.
The dispute originates from India's decision in September 2023 to issue its largest-ever import tax claim against Volkswagen. Authorities accuse the automaker of using a strategic loophole—breaking down imported Volkswagen, Skoda and Audi vehicles into separate components rather than importing them as completely knocked-down (CKD) units.
Under Indian tax laws, CKD units attract a tax rate of 30-35%, whereas importing individual parts separately incurs a lower tax rate of just 5-15%.
Volkswagen's defence
Volkswagen maintains that its "part-by-part import" approach was always transparent and was communicated to the Indian government, receiving official clarifications in 2011. The company's legal filing states, "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."
While the Indian finance ministry and the customs department have not responded to inquiries outside regular business hours, Volkswagen remains committed to defending its case.
In a statement, the company affirmed that it is "using all legal remedies" while cooperating with authorities and maintaining full compliance with global and local laws.
Potential consequences and investor sentiment
Industry experts fear that if the tax demand is upheld, Volkswagen India could suffer severe financial repercussions. A government source indicated that, with penalties included, the total liability could reach approximately US$2.8bn—an alarming figure given Volkswagen India's reported sales of US$2.19bn and a net profit of just US$11m in the 2023-24 fiscal year.
The tax dispute is critical for Volkswagen, which is already facing global challenges. It is working to cut costs in response to increasing competition from Chinese manufacturers and sluggish European demand.
Recently, Volkswagen announced plans to cut 35,000 jobs in Germany and is considering selling some of its operations in China.
The 'kit' controversy and import strategy
A central aspect of Volkswagen's defence is its import methodology. It argues that it did not import car components as a single "kit" but procured parts separately and supplemented them with locally sourced materials. To illustrate the point, Volkswagen's legal filing parallels an online shopping scenario: "A practical analogy is buying a chair online from Amazon, which is then delivered in one shipment with all parts and fixtures needed to assemble the piece of furniture."
However, Indian authorities contend that Volkswagen exploited software that facilitated bulk orders for entire vehicles from suppliers in Germany, Mexico and the Czech Republic.
The authorities claim that the software subsequently fragmented these orders into shipments of 700-1,500 parts per vehicle, ensuring that all components eventually arrived under different classifications to avoid higher duties. According to Indian authorities, this was "a ploy to clear the goods without the payment of the applicable duty."
In court documents, Volkswagen refutes the claim that "there is no exclusive utilization of the parts towards the manufacture of one specific car." The company further denies allegations of clandestine software use, asserting that the system enables dealers to track consumer demand at a macro level.
Broader implications for foreign investment
Volkswagen's legal challenge highlights broader concerns among multinational corporations regarding India's tax policies. The country has a history of high import duties and prolonged legal disputes affecting foreign firms. Notably, Tesla has publicly voiced concerns about India's steep taxes on imported EVs, which have hindered its entry into the market.
Volkswagen argues that the tax notice "deals a body blow" to India's reputation as a business-friendly nation, potentially discouraging future foreign investment. The sentiment contradicts the government's ongoing efforts to promote its "Ease of Doing Business" initiative, which aims to attract global companies.
What's next?
The Mumbai High Court will hear Volkswagen's case starting February 5. The outcome of the legal battle will not only determine the German automaker's financial liabilities but could set a precedent for how India treats foreign corporations in tax-related disputes.
As the case unfolds, investors and industry experts will closely watch whether India reinforces its commitment to a predictable and transparent business environment or if the dispute marks a turning point in its taxation policies.
Stay informed and inspired with the EV Magazine community by signing up for our free weekly newsletter. Each week, receive in your inbox the latest industry news and in-depth insights into the world of electric vehicles, sustainability and cutting-edge innovations
Subscribe now, don’t miss the opportunity to stay ahead in the fast-evolving EV industry.
EV Magazine is a BizClik brand