Skoda Auto Volkswagen India slapped with USD 1.4 billion tax evasion notice: Report

Skoda Auto Volkswagen India has been issued a notice by the government of India for supposedly evading USD 1.4 billion in taxes by 'wilfully' paying lesser import tax on parts for its Skoda, VW, and Audi cars, as per a document, making it one of the biggest demands of this nature, Reuters noted.

A note dated September 30, states that Volkswagen used to import 'almost the entire car' in an unassembled state. A 30-35% import tax is levied in India for completely knocked down units, but the firm escaped this by 'mis-classifying' and 'mis-declaring' these imports as ' individual parts, which attract a much lower duty ranging from 5-15%, Reuters reported. 

The newswire further said that these imports were made by VW's India unit Skoda Auto VW India for models such as the Kodiaq, Skoda Superb, luxury cars of the likes of Audi A4, Audi Q5 and Tiguan. 

As per the Indian investigation, different 
batches were shipped to avoid detection and 'wilfully evade' paying higher taxes, the newswire noted. 

"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," said the 95-page notice by the Office of the Commissioner of Customs in Maharashtra. This is not in public domain but was reviewed by Reuters.  

The authority noted that since 2012, VW's India unit should have paid import taxes and levies to the tune of USD 2.35 billion to the Indian government, whereas it actually paid USD 981 million, translating to a yawning gap of USD 1.36 billion.

In a statement, Skoda Auto Volkswagen India said 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."

A government official who spoke to the publication on condition of anonymity noted that in such cases, the penalty could go to 100% of the evaded amount in such instances, and effectively, the company could end up paying roughly USD 2.8 billion in total, the newswire noted.

Foreign companies have often been bemused by higher taxes and protracted legal disputes in India. Tesla has been talking about high taxes on imported cars for years and Vodafone has fought tax related cases. BYD is also undergoing an Indian tax investigation for underpaying taxes to the tune of USD 9 million on imports, the newswire noted. 

Reuters further stated that VW is a small player in India's car market comprising 4 million units a year, and has faced challenges in bolstering sales. This adds to its woes, where its Audi brand is behind competitors BMW and Mercedes in the luxury space. 

Indian investigators said in the notice that Mercedes was adhering to the required rules to shell out a 30% tax, by way of importing CKD units as opposed to segregating the individual parts, Reuters noted. 

Inspectors searched three of Volkswagen India's facilities in 2022, including the two factories in Maharashtra. Documents pertaining to component imports and an email backup of top executives was taken at the time, as per the newswire. 

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.
Reuters could not elicit a response from Arora on this issue. 

The Indian notice said basis the company's internal software, that Skoda VW India regularly placed bulk orders for cars via an internal software, which connected it to suppliers in Czech Republic, Germany and Mexico, among 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. 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.

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.