Volkswagen faces a $1.4 billion tax dispute in India over import classification. The case threatens its $1.5 billion investment, delays shipments, and raises concerns about foreign investor confidence in India’s policies.
The Indian government claims Volkswagen imported car parts that attract a higher tax but misclassified them as individual components to pay a lower duty. This dispute has led to shipment delays and disruptions in spare parts supply. Volkswagen has challenged the tax demand in the Bombay High Court, arguing that it contradicts New Delhi’s import taxation rules and could harm its business and foreign investment in India.
Volkswagen Sues Indian Authorities Over Tax Demand
As of February 2, 2025, Volkswagen has filed a lawsuit against Indian authorities, seeking to overturn an “impossibly enormous” $1.4 billion tax demand. The company argues that the claim contradicts India’s import tax regulations and threatens its business plans, according to court documents reviewed by Reuters.
Skoda Auto Volkswagen India, Volkswagen’s local subsidiary, told the Bombay High Court that the tax dispute endangers its $1.5 billion investment in India and could negatively impact the country’s foreign investment climate.
India’s Biggest Import Tax Demand on Volkswagen
In September 2023, India issued its largest-ever import tax notice, alleging that Volkswagen used a strategy to import vehicles as separate components to avoid higher duties.
Authorities claim Volkswagen imported “almost entire cars” in unassembled form, which should have been taxed at 30-35% as Completely Knocked Down (CKD) units. However, by declaring them as individual parts, Volkswagen reportedly paid only a 5-15% levy. These imports, which included models such as the Skoda Superb, Kodiaq, Audi A4, Q5, and VW Tiguan, allegedly bypassed higher taxes through separate shipments.
Volkswagen contends that it had informed the Indian government about its “part-by-part import” model and had received official clarifications supporting its approach in 2011. The company argues that the tax demand contradicts previous government positions and undermines investor confidence in India’s regulatory framework.
The tax notice, issued by the Office of the Commissioner of Customs in Maharashtra, accuses Volkswagen of employing an artificial arrangement to avoid paying the applicable duty. Authorities claim that between 2012 and 2024, Volkswagen’s India unit should have paid $2.35 billion in import taxes but instead paid only $981 million, creating a shortfall of $1.36 billion.
Volkswagen Shipments Held at Customs
Some of Volkswagen India’s air shipments of car components were briefly held by customs authorities in Mumbai due to the ongoing tax dispute. The delays affected spare parts supply at dealerships. Over 50 shipments were reportedly affected, mainly consisting of spare parts.
To release the shipments, Volkswagen was required to provide bank guarantees, but discrepancies related to the tax issue caused delays. A government official confirmed that the matter has since been resolved but did not disclose the settlement details.
What Is the Volkswagen Tax Dispute About?
Volkswagen argues that it should not be liable for higher import taxes because it did not import car parts as a single “kit.” Instead, it shipped components separately and combined them with local parts for final assembly, aligning with regulatory norms.
To explain the classification issue, authorities compare it to ordering a chair online: If all parts arrive in a single package, it qualifies as a “kit,” but if they arrive separately, they may be taxed differently.
Indian officials allege Volkswagen’s internal software helped break down bulk orders for vehicles into individual parts. These were then shipped separately from suppliers in the Czech Republic, Germany, Mexico, and other countries. Authorities argue this was a deliberate tactic to evade higher import duties.
Volkswagen denies any wrongdoing, stating that its software is only used to track consumer demand and facilitate dealer orders. The company insists that there is no “exclusive utilization” of imported parts for manufacturing a specific car.
A Tough Time for Volkswagen
The tax dispute comes as Volkswagen faces multiple global challenges, including declining sales, competition from Chinese automakers, labor issues, and potential tariffs under former U.S. President Donald Trump’s policies.
In India, Volkswagen holds less than a 2% market share but is expanding with new models and further investments. In 2019, the company merged its three passenger car subsidiaries into Skoda Auto Volkswagen India to enhance efficiency and market competitiveness. The group has committed over €1 billion to its India 2.0 strategy, aiming for significant market growth by 2025.
However, the current tax controversy could disrupt Volkswagen’s plans, adding legal and financial hurdles as it tries to strengthen its presence in the world’s third-largest car market.
