25,200 Crore Rupee Tax Demand Matter Of Life And Death: Volkswagen India

In a shocking move, the Indian government served a 12,600 Crores tax notice to Volkswagen India. The German giant was blamed for allegedly cheating the government. Skoda Auto Volkswagen India Private Limited (SAVWIPL) allegedly evaded tax of 12,600 crore rupees (1.4 billion USD) by ‘willfully’ misrepresenting semi-built cars (known as completely knocked down units) as spare parts at the time of import. The carmaker is currently facing trials for the same. Volkswagen India reportedly made a plea saying that the total bill of 2.8 billion USD (25,200 Crore Rupees) including the penalty is a matter of life or death for the brand.

It disputed the massive tax demand by stating a few reasons. As per the Customs Act, the penalty component for duty evasion is 100%. This means that the net bill for VW India would mount to 2.8 billion (1.4 + 1.4 bn). This is the biggest duty penalty ever imposed on a carmaker by the Indian government. VW India seems to be deeply worried about the same too.

The German giant’s lawyer also argued in the Bombay High Court that the practice of importing parts and assembling them locally is followed by other manufacturers as well. The massive fines on Volkswagen India will thus set a dangerous precedent for other OEMs.

The entire automotive sector will now have to make peace with the new regime of taxing imported semi-built cars higher (30-35%) when spares have much lower slabs. This will also raise concerns about doing business in India among manufacturers and would affect foreign investments. The company’s lawyer even said “This (new regime) will turn India into a laughing stock” The brand further said that they follow this practice of importing spares and assembling them locally in markets like Thailand, Mexico and Malaysia as well.

Volkswagen also finds the ‘show cause’ notice bizarre as they have been doing the same since 2011, and have done at least 30,000 shipments, and it is only in 2025 that they are served a notice. The company has thus sought quashing of the same. We are yet to hear from the tax department which is expected to come up with a strong defence for the show-cause notice.

Volkswagen India’s Tax Evasion: What Is The Mess All About?

Before we discuss the specifics of this issue, the tax notice was served in September 2024, and is thus not too recent. The issue here is that Volkswagen India allegedly cited semi-built cars (Completely Knocked Down Kits- CKDs) as spare parts at the time of import.

In India, CKD units are taxed 30-35% whereas spare parts attract a tax of just 5-15%. This means that Volkswagen India could evade a huge chunk of tax money. Instead of paying the Indian government 2.35 billion US dollars in customs duty, they could make do with just $981 million.

Skoda (the company that handles VW’s Indian operations) allegedly imported Tiguans, Kodiaqs, Superbs, Audi A4s and A6s by declaring CKD kits as spare parts, thereby evading tax.

Embarking on the CKD route also has the advantage of being less labour-intensive than complete local manufacturing. The Indian government promotes and prefers CKD over complete imports as this line of manufacturing generates job opportunities and nurtures the local economy.

Having said that, it is definitely bizarre to have two extremely different tax slabs for CKD kits and spare parts when there exists the opportunity for manufacturers to ‘willfully’ misinterpret one for the other and save huge sums in duty.