• Volkswagen has been issued a $1.4 billion tax evasion notice by the Indian government.
• The company allegedly paid lesser import tax on components for its Audi, VW, and Skoda cars.
• The news led to a 2.13% fall in Volkswagen shares on the Frankfurt stock exchange.
• The company has been asked to respond within 30 days to the allegations.

In a recent development that has sent shockwaves through the automotive industry, German automaker Volkswagen has been issued a notice by the Indian government for allegedly evading $1.4 billion in taxes. The accusation is that the company wilfully paid lesser import tax on components for its Audi, VW, and Skoda cars. This is one of the largest such demands ever made by the Indian authorities.

The notice, dated September 30, alleges that Volkswagen used to import almost the entire car in an unassembled condition, which attracts a 30-35% import tax in India under rules for CKD, or completely knocked down units. However, the company is accused of evading these levies by mis-declaring and mis-classifying those imports as individual parts, thereby paying just a 5-15% duty.

The imports were made by Volkswagen's India unit, Skoda Auto Volkswagen India, for its models including the Skoda Superb and Kodiaq, luxury cars like Audi A4 and Q5, and VW's Tiguan SUV. The Indian investigation found that different shipment consignments were used to evade detection and willfully evade payment of higher taxes.

Volkswagen's Response and Impact on Shares

The Office of the Commissioner of Customs in Maharashtra, in a 95-page notice, stated, This logistical arrangement is an artificial arrangement ... operating structure is nothing but a ploy to clear the goods without the payment of the applicable duty. This document is not public but was seen by Reuters.

The news of the tax notice led to a fall in Volkswagen shares by as much as 2.13% on the Frankfurt stock exchange. The notice alleges that since 2012, Volkswagen's India unit should have paid import taxes and several other related levies of about $2.35 billion to the Indian government, but paid only $981 million, amounting to a shortfall of $1.36 billion.

In response to the allegations, Skoda Auto Volkswagen India stated that it is a responsible organization, fully complying with all global and local laws and regulations. We are analyzing the notice and extending our full cooperation to the authorities. The company has been asked to respond within 30 days, but it is unclear whether they have done so yet.

Investigation Details and Historical Context

In 2022, inspectors searched three of Volkswagen India's facilities, including the two factories in Maharashtra. Documents related to component imports and email backup of top executives were seized at the time. The company's India Managing Director, Piyush Arora, was questioned last year and asked why all the parts required to assemble a car are not shipped together, but he was not able to answer this question, the investigators said in the notice.

The Indian notice, based on a review of the company's internal software, said Volkswagen India regularly placed bulk orders for cars through an internal software which connected it to suppliers in the Czech Republic, Germany, Mexico, and other nations. After the order was placed, the software broke it down into main components/parts, roughly 700-1,500 for each vehicle depending on the model.

The car parts were packed abroad in different containers within a span of three to seven consecutive days under multiple invoices, and then reached the Indian port roughly at the same time, Indian authorities alleged.

This appears to have been done to pay lesser duties applicable on these individual parts, the notice said, adding the carmaker deliberately misled customs authorities. Volkswagen told investigators it was using such a route for efficiency of operations, but the argument was dismissed. Logistics is a very small and rather least significant step of the whole process ... (Skoda-Volkswagen India) is not a logistics company, the notice said.

This incident is reminiscent of similar historical events where multinational companies have faced allegations of tax evasion. For instance, in 2015, Google faced allegations of evading taxes in several European countries by shifting its profits to a subsidiary in Bermuda. In 2016, Apple was ordered to pay €13 billion in back taxes to Ireland by the European Commission.