Scrapping Volkswagen's $1.4B tax bill will be 'catastrophic': Modi government
What's the story
The Indian government has vehemently opposed Volkswagen's plea to overturn a $1.4 billion tax bill, cautioning of possible "catastrophic consequences."
The dispute revolves around allegations of misclassification of car parts by the automaker, which could have a major impact on its operations in India.
The case is currently being heard in Bombay High Court.
Implications
Tax demand raises concerns among foreign investors
This unprecedented demand for back taxes on account of import duties comes after a thorough examination of 12 years of Volkswagen's shipments.
It has reignited concerns among foreign investors about prolonged investigations.
The automaker has termed this legal battle a "matter of life and death" for its business in India, and is currently contesting the tax authority's decision in HC.
Allegations
Skoda Auto Volkswagen India faces allegations of misclassification
Skoda Auto Volkswagen India, the automaker's subsidiary, is accused of misclassifying component imports for select Audi, Volkswagen and Skoda cars to evade higher tariffs.
The company's main argument against the tax demand rests on the alleged "inaction and tardiness" of tax officials in delaying shipment reviews.
However, the Indian tax authority has refuted these claims in a detailed 78-page rebuttal to the HC.
Rebuttal
Tax authority refutes Volkswagen's claims in court filing
In its rebuttal, the tax authority accused Volkswagen of causing delays by withholding essential information and data about its imports.
The tax authority warned that accepting the carmaker's reasoning could set a precedent for importers to withhold vital information, and then argue that the time-limit for a probe had expired.
This could have "catastrophic consequences," according to their March 10 filing.
Market impact
Volkswagen's future in India hangs in the balance
Volkswagen has a small stake in India's car market, the third-largest in the world. If guilty, it may face a tax bill of $2.8 billion, including penalties and delayed interest.
Prime Minister Narendra Modi has been pushing foreign investors with promises of easier rules and lesser red-tapism.
However, long tax investigations which can result in lawsuits of several years, continue to be a major concern.
Investor concerns
Tax notice puts foreign investors' trust at risk
Volkswagen claimed that had New Delhi completed its reviews earlier, it could have contested the findings or modified its import strategy.
The September 2024 tax notice threatens "the very foundation of faith and trust" that foreign investors desire, the company said.
In response to these allegations, the government has asked the HC to direct Volkswagen to follow procedures and approach them directly over their tax notice.