Volkswagen and its subsidiary škoda Auto have been in India for more than three decades. Nevertheless, they struggle to create a place for “German precision and quality” in the domestic car market. The sales in 2024 were lower than the previous year and had a bottom of the market share of competitive foreign brands, barely two percent of the total car sales in India.
Like US President Donald Trump’s “to make the US re -make great”, India hoped that high import tariffs would encourage foreign direct investment (FDI) for manufacturing cars.
This strategy has been effective, foreign brands have contributed to 30 percent car manufacture in India, and with another 44 percent Maruti Suzuki, A foreign cooperation. Home-developed manufacturers, such as Tata and Mahindra, are responsible for the remaining 27 percent.
Bad luck, they say, comes in the spad. For Volkswagen, a denumement came through a tax demand of $ 1.4 billion in unpaid import tax in the last decade. If the delayed interest and punishment are added, it increases by about $ 2.8 billion.
This amount represents a significant 7 to 14 percent of Volkswagen’s global earnings before interest and EBIT in 2024. The Government of India alleges that Woakeswagen has incorrectly committed imports as “parts”, which attracts less duty of 5 to 15 percent instead of 30 to 35 percent, which applies completely to (CKD) cars.
Inequality in import tax regime
Why are there separate tax rates for two imports? India increases the price joint by charging high imports for the final consumer products while imposing tax on manufacturing inputs at low rates. Cars below $ 40,000 are attracted to 60 percent import duty, while those high -value are levied 100 percent tax – designed to “soak rich” of imported cars.
In contrast, domestic manufactured cars are subject to Goods and Services Tax (GST) With an increase in tax rates based on engine capacity, size and sale price, from 28 to 50 percent, but low rates are being offered for green vehicles.
However, there are many anomalies in the system:
First of all, why encourage import abortion by constructing 20 to 25 percent tax cost profit, if CKD imports are missed as parts? The paper gains booked by the importer are finally likely to be drought by demands from any tax authorities, as is happening with Volkswagen.
Second, what is the argument to charge low import duty for parts compared to the applied rate for CKD imports? A general import for both can eliminate temptation to play duty system. This will also align at the tax administration’s simplicity and the justified design of the tax.
The need to import a part only arises only when someone has collected a fully imported car or CKD car in India. Then, why the parts should be imported to repair damaged cars should not be charged at the same duty rate as is currently applied to the import of car or purchase of CKD?
What is the matter that expensive cars manufactured in India are charged at the rate of GST and additional cessal at about 50 percent, which is more than 30 to 35 percent import tax rate for import of CKD cars. The GST rate must be lower than the CKD rate to completely encourage the manufacture of automobiles in India.
The imports of parts can be uniformly discouraged by imposing tax at the same rate of CKD, and currently not low. Homegron auto manufacturers should not be damaged compared to “screwdriver” assemblies of foreign cars in India.
Volkswagen has challenged this tax demand in the Bombay High Court. It has claimed that tax authorities have delayed their investigation and the demand is arbitrary and excessive that it is a “case of life and death” for its operation in India, and has an investment of $ 1.5 billion.
Need for efficient tax systems
No one loves more tax authorities than the Union Finance Minister because they are primary agents ensuring revenue by fiscal flexibility and bounce.
Demand for tax on Volkswagen between five and 10 percent of Rs 2.35 trillion received as customs revenue in 2024-25. No surprise, then, the government has warned that reducing the demand for this tax can lead to a dangerous example and encourage corporates to withdraw information and delay the inquiry.
From the point of view of investors, such cumulative, large tax demand, issued retrospective, reflects the incapacity of the tax system.
Why should the Revenue Department take more than a decade to identify import abortion? A red flag should be raised automatically when imports of parts exceed a predetermined ratio – use five percent in a year – in the number of imported cars and CKDs.
Customs data is digitized and it can be analyzed to identify the pattern of miscarriage, tax or tax evasion. Better tax evaluation tools and system support are important for tax departments.
Learning from Vodafone tax dispute
in 2007, Vodafone A Dutch company, International Holdings, acquired a 67 percent stake in the Cayman Islands, an Indian telecom company Hachisan Essar Limited (HEL), an Indian telecom company in the Cayman Islands.
At the “Trumpian” moment, the then Finance Minister, Pranab Mukherjee pushed the tax authorities to capture Vodafone (buyer), which was liable to pay a capital profit tax of about Rs 110 lakh crore on offshore transactions, as the inherent assets were located in India, and they did not choose capital gains.
Vodafone challenged the demand for tax, arguing that the transaction was organized offshore and did not attract Indian tax laws. The Supreme Court ruled in favor of Vodafone in 2012. Unhappy with the ruling, the Government of India amended the Income Tax Act in 2012, rebelled such transactions to taxable form, comprehensive criticism and implemented concerns about “tax terrorism”.
This was the Modi government which canceled the provisions for the retrievable tax in the Finance Bill 2021, giving substance to equity and justice in the application of tax laws.
While it is completely appropriate to do deficiencies in the law, investors should be assured that the remaining, appropriately practical within the law is a joint responsibility and not a one-leg run race alone. Tax should be design Unlike SANS for tax revenue collection to increase comprehensive and expensive litigation.
(Sanjeev S Ahluwalia is a prestigious partner, Chinton Research Foundation (CRF), a former IAS officer and expert in governance and economic regulation. This is an opinion piece. All the thoughts expressed are their own.The QuintNeither endors nor responsible for them.)
