India’s demand for 1.4 billion in back taxes from Volkswagen,following a 12−year investigation, reignited fears among foreign investors about the risks of prolonged tax disputes, according to Reuters.
The case highlights a broader issue, with automakers like Maruti Suzuki, Hyundai, Honda, and Toyota collectively facing tax demands of around 6 billion in disputes spanning income tax, customs, and other payments.
Despite Prime Minister Narendra Modi’s efforts to attract foreign investment by simplifying regulations and reducing bureaucratic hurdles, lengthy tax investigations remain a significant concern.
The disputes often lead to years-long legal battles, as seen in the high-profile case of Vodafone, which won a decade-long fight against a 2-billion retrospective tax demand.
Volkswagen’s recent decision to sue India over the 1.4 billion tax claim, which it describes as “impossibly enormous,” has further unsettled foreign businesses. Calls are growing for an amnesty scheme to resolve long-pending disputes, especially as India recently introduced a three-year window to conclude customs shipment reviews, excluding older cases worth billions of dollars.
Challenges in India’s manufacturing ambitions
Modi’s vision to transform India into a global manufacturing hub faces challenges, particularly as many electronics and auto companies rely on imported parts for assembly operations. This reliance often triggers customs investigations.
Government data reveals that pending service tax, customs, and excise disputes amounted to nearly $53 billion in November 2024, with 70% of the cases tied up in litigation.
In the category of customs disputes alone, India had made tax demands of $4.5 billion by March 2024, with a third of these cases pending for over five years. The Volkswagen case has prompted companies to seek updates on their shipment reviews to ensure proper tax classification.
Tax backlog and bureaucratic delays
India’s customs, excise, and service tax appeals tribunal faced a backlog of 80,000 cases in 2023, with 20,000 new cases added annually, according to former revenue secretary Sanjay Malhotra. This backlog, combined with bureaucratic inefficiencies, has led to significant delays.
In Volkswagen’s case, Indian authorities accuse the company of importing parts for 14 models in separate shipments, paying lower taxes (5% to 15%) instead of the 30% to 35% applicable to completely knocked-down units.
Volkswagen, in its court filing in Mumbai, blames Indian officials for their “inaction and tardiness” in reviewing shipment records dating back to 2012. The company argues that earlier resolution could have allowed it to adjust its import strategy, but the delayed tax notice now undermines the trust of foreign investors.
Two anonymous government officials acknowledged that both bureaucratic delays and insufficient documentation from Volkswagen contributed to the prolonged dispute. Shashi Mathews, head of indirect tax practice at IndusLaw, emphasised that such delays harm business confidence, with increasing client queries about the status of their shipment reviews.
As India seeks to balance its tax enforcement with investor-friendly policies, resolving such disputes will be crucial to maintaining its appeal as a destination for foreign investment.
