Volkswagen India faces $1.4 billion fine for tax evasion – Car News

India has issued a notice to German carmaker Volkswagen for allegedly evading $1.4 billion in taxes by “deliberately” paying less tax on the import of components for its Audi, VW and Skoda cars, a document shows, in one of the largest such demands.

A Sept. 30 report said Volkswagen ( VOWG_p.DE ) imported “almost all” car in disassembled condition, which charges an import tax of 30-35%. India under CKD rules, or completely knocked down units, but evaded duty by “misdeclaring and misclassifying” these imports as “separate parts” paying only 5-15% duty.

Such imports were carried out by the Indian division of Volkswagen, Skoda Auto Volkswagen India, for its models including Skoda Superb and Kodiaq, luxury cars such as Audi A4 and Q5, as well as the VW Tiguan SUV. An Indian investigation found that various shipments were used to avoid detection and “deliberate evasion” of higher taxes.

“This logistical arrangement is an artificial arrangement…the operational structure is nothing but a ruse to clear goods without paying the appropriate duty,” the Maharashtra Customs Commissioner’s office said in a 95-page report, which has not been made public. but it was seen by Reuters.

Volkswagen shares fell 2.13% on the Frankfurt Stock Exchange after Reuters reported India’s tax notice.

Since 2012, Volkswagen’s Indian unit was supposed to pay import taxes and several other related charges of about $2.35 billion to the Indian government, but has paid only $981 million, a shortfall of $1.36 billion, authorities said.

In a statement, Skoda Auto Volkswagen India said it is a “responsible organization that fully complies with all global and local laws and regulations. We are analyzing this report and cooperating fully with the authorities.”

A government official, who spoke on condition of anonymity, said the fine could typically be as high as 100 percent of the evasion amount in such cases if the company is found guilty, which could force the company to pay about $2.8 billion.

High taxes and lengthy litigation have often been a problem for foreign companies in India.

Electric car maker Tesla, for example, has complained for years about high taxes on imported cars, while Vodafone has struggled with tax evasion cases. Chinese automaker BYD also faces an ongoing tax investigation in India for underpaying about $9 million in import taxes.

Factories were searched, managers were interrogated

Volkswagen plans to invest $1.8 billion in manufacturing electric cars and hybrids in Maharashtra, and in February signed a deal to supply electric components to India’s Mahindra ( MAHM.NS ). In May, the group’s chief financial officer said he was “very positive about India”.

Still, Volkswagen is a tiny player in India’s car market with 4 million units a year and is struggling to grow sales. The case could add to headaches in India, where its Audi brand is already lagging behind luxury rivals such as Mercedes ( MBGn.DE ) and BMW (BMWG.DE).

Indian investigators said in their report that Mercedes followed the necessary rules to pay the 30% tax by importing CKD units of its cars, rather than separating individual parts.

In 2022, inspectors searched three Volkswagen India facilities, including two plants in Maharashtra. Then, documents were seized on the import of components and backup copies of e-mails of top managers.

The company’s managing director in India, Piyush Arora, was questioned last year and asked “why all the parts needed to assemble the car were not shipped together,” but “he was unable to answer that question,” investigators said in a statement.

Arora did not respond to Reuters’ request for comment.

Software usage, modus operandi

The Indian report, based on an examination of the company’s internal software, said Volkswagen India regularly places bulk orders for cars through internal software that connects it with suppliers in the Czech Republic, Germany, Mexico and other countries.

Once the order was placed, the software would break it down into “major components/parts”, roughly 700-1500 for each car depending on the model.

Then the deliveries began.

The auto parts were packed overseas in different containers over three to seven consecutive days under multiple invoices and then reached an Indian port around the same time, Indian authorities said.

“This appears to have been done to pay the lower duties applicable to these individual parts,” it said, adding that the automaker “intentionally misled customs authorities.”

Volkswagen told investigators it was using the route for “operational efficiency,” but the argument was rejected. “Logistics is a very small and least significant step in the whole process … (Skoda-Volkswagen India) is not a logistics company,” it said.