Indian Govt to High Court: Canceling 12000 Crore Tax Notice To Volkswagen Would Be 'Catastrophic'

The legal battle between the Indian Government and Volkswagen Group is heightening at the Bombay High Court (HC). The latest information reveals that the Indian Government is adamant about the penalty and doesn't want to let VW Group walk away from the humongous tax bill. The Customs Department has made its stand clear. The government says that quashing the bill will have 'catastrophic consequences' and could potentially encourage more companies to take the (alleged) misclassification route.

A scrutiny of shipments by the Volkswagen Group (which included Audi, Volkswagen and Skoda models) for the past 12 years by the Customs Department led to the discovery of discrepancies, subsequently landing the carmaker in trouble and a high-stakes legal battle. This has also brought back fears over lengthy investigations among foreign investors.

The $1.4 billion tax penalty is the biggest that the government has ever imposed on any automaker. It won't be easy for Volkswagen Group to pay it off if they were to yield to the government's demand or in case of the court ruling against them. If it loses the battle, VW Group will have to pay the Indian government a total of $2.8 billion, including penalties and delayed interest. This, according to the manufacturer could be a matter of life and death.

The Indian car market is the third largest in the world. Volkswagen, however, is a tiny player in it. Even the Audi brand lags behind its rivals- Mercedes Benz and BMW in sales. Thus, having to pay such a huge tax bill could be damning.

Volkswagen has requested to quash the case, citing the 'inaction and tardiness' of Customs officials in delaying shipment reviews and in coming up with the back tax demand. Following this, the High Court asked the Customs Department to explain the delay in delivering the show-cause notice to Skoda Auto Volkswagen India. The bench consisting of Justices B P Colabawalla and Firdosh Pooniwalla sought an explanation, saying:

'Their (Volkswagen) argument is that once you (customs) have classified them under one category all these years, can you now re-classify them?'

Additional Solicitor General N Venkatraman defended the tax department stating that a thorough investigation was conducted before issuing the show-cause notice and that ''new facts' about how the company was importing and assembling, were only uncovered recently'.

He further stated that the delay in spotting the details of the discrepancy was because Volkswagen failed to provide the necessary documents in time. The 78-page rebuttal submitted by the Tax Department explained this in detail.

According to the Tax department, accepting Volkswagen's reasoning and quashing the case could set a bad example. We could then see more importers suppressing vital information and further trying to evade taxes and quash lawsuits by citing 'late investigation' as the reason. This was stated in a filing that hasn't been made public and first reported by Reuters.

A recent filing by the tax department also argues that Volkswagen was submitting "information and documents critically required for" completing shipment reviews "only in tranches".

Volkswagen, however, continues to hold their stand and says that if the officials had wrapped up the review earlier, it could challenge the findings or re-evaluate the import strategy. It says that the tax notice puts "at peril the very foundation of faith and trust" foreign investors desire.

It is interesting to note that this fierce legal battle commences at a time when Prime Minister Narendra Modi is actively promising simpler regulations and lower bureaucratic hurdles for foreign investors. The High Court will hear the case on Monday, and the ruling here could be of prime importance for India's business landscape.