Volkswagen and India: dispute over a billion-dollar tax claim

German carmaker Volkswagen has decided to take strong legal action against the Indian authorities and has filed a lawsuit against their tax ruling. The company is seeking cancellation of an "extremely high" tax claim of $1.4 billion. According to Volkswagen, this demand is in violation of India's rules for importing auto parts and threatens the carmaker's business plans.

The tax claim and its impact on foreign investment

Indian authorities assessed a record import tax of $1.4 billion onVolkswagen $VWA.BRin September 2023 . They argue that the carmaker artificially split imports of VW, Skoda and Audi cars into individual components to avoid higher duties. Indian law imposes a 30-35% duty on CKD units (completely disassembled cars), while individual parts are taxed only 5-15%.

Volkswagen's defence is that it has informed the Indian authorities about its import method and received confirmation that the procedure is in accordance with the law. The suit claims that India's decision contradicts the government's previous position and undermines the confidence of foreign investors. The dispute thus threatens Volkswagen's $1.5 billion investment in India.

Threat of heavy sanctions

If Volkswagen loses the dispute, the total amount including sanctions could reach $2.8 billion. This would be a significant financial burden as VW India posted sales of $2.19 billion in 2023-24 and a net profit of just $11 million.

Impact on the business environment in India

Volkswagen has warned that this dispute may have a negative impact on the "climate" for foreign investment in India. High taxes and protracted legal disputes have deterred several international firms in the past. Tesla, for example, has criticised high tariffs on imports of electric vehicles, which complicate its entry into the Indian market.

A court in Mumbai will start hearing the case on 5 February. The outcome of this case will have a significant impact not only on Volkswagen but also on the overall business climate in India.

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Source: CNN