India's Back Tax Demand From Volkswagen A Red Flag For Foreign Investors
The move came after 12 years of scrutiny;
India's Back Tax Demand From Volkswagen A Red Flag For Foreign Investors
The move came after 12 years of scrutiny
India's demand for $1.4 billion back taxes from Volkswagen, which called it “impossibly enormous”, has fueled concerns that lengthy investigations and litigation could sour foreign firms’ plans to invest in the fastest-growing major economy.
Despite Prime Minister Narendra Modi courting foreign investors with promises to simplify regulations and uproot bureaucratic hurdles, lengthy tax investigations are a sore point, often prompting prolonged lawsuits.
Meanwhile, tax advisers and lawyers are receiving queries from clients on how years-old tax cases could come back to haunt them. They are enquiring about an amnesty scheme for cases running for years, as on 01 February, India set a three-year window to conclude reviews of customs shipments, but the rule excludes old disputes running into billions of dollars.
Ameya Dadhich, a tax associate at global law firm DLA Piper remarked, “While the government noted and redressed it recently, it’s unlikely that old tax demand notices will be given any benefit.”
"Such instances can deter foreign companies from investing heavily in India. An amnesty scheme will be helpful given that around 40,000 tariff disputes are pending," he added.
The PM expects to turn India into a manufacturing hub. However, electronic and auto companies that rely on assembly operations using parts for high-end cars or smartphones imported from China and Europe, often elicit investigations.
The data revealed pending arrears of service, customs and excise tax were $53 billion in November 2024, with 70 percent disputed in litigation. In the import tariff and customs disputes, by March 2024, India demanded $4.5 billion, with a third pending for over five years.
With the Volkswagen demand, foreign automakers were gathering updates on scrutiny of their shipments, to ensure their imports were classified correctly for taxes.
Recently, in a move seen to placate US President Donald Trump, who once called India a ‘tariff king’, the Indian government cut average tariffs to 11 percent from 13 percent. Still, the ratio exceeds China, Japan and the US.
Imports of fully built luxury cars face 100 percent in Indian taxes, while for Scotch whisky and wine, the rate is 150 percent.
In the highly competitive auto sector, Volkswagen is not alone in facing tax scrutiny. Maruti Suzuki, Hyundai, Honda and Toyota have been facing demands for $6 billion collectively in disputes on income tax, customs and other payments for the past many years.
Maruti has a $2.4 billion tax demand in dispute, with at least one case concerning transactions from 1986. Volkswagen is locked in tussles over $1.2 billion, apart from the current demand. Hyundai faces $488 million.
Another high-profile case was of Vodafone. However, the telecom company won against a $2-billion retrospective Indian tax demand after over a decade of battle with New Delhi, including international arbitration at The Hague, Netherlands.
In 2023, then revenue secretary, Sanjay Malhotra had stated, "We are not able to reduce the backlog."
At that time, India's appeals tribunal for customs, excise and service tax faced a backlog of 80,000 cases, with 20,000 new cases each year.
The Indian government has accused Volkswagen of having imported most parts of 14 models in separate shipments before assembling them locally, paying taxes ranging from 5 percent to 15 percent. It said the strategy circumvented the tax of 30-35 percent, if the same items were imported in a single shipment as a completely knocked down (CKD) unit.
In its filing before the court in Mumbai, Volkswagen has blamed Indian officials for their ‘inaction and tardiness’ in reviewing the 2012 shipment records. If it had been done early, the company could have challenged or re-evaluated its import strategy. However, the tax notice eroded the faith and trust foreign investors seek from India.
Shashi Mathews, head of indirect tax practice at IndusLaw agreed, "Long pendency like in Volkswagen's case has a detrimental effect on business. We are seeing an increase in queries from clients wanting to know the fate of their shipment reviews."