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Skoda Auto Volkswagen faces a potential Rs. 24,000 crore penalty for alleged tax evasion through misclassification of imported car parts for Skoda, Volkswagen and Audi brand in India
The Indian government has accused Skoda Auto Volkswagen India of evading import duties worth $1.4 billion (approximately Rs. 12,000 crore) over the past decade through the alleged misclassification of imported car parts. If proven guilty, the automaker could face penalties that double the tax shortfall, potentially amounting to a total liability of Rs. 24,000 crore.
Allegations of Misclassification and Evasion
The Customs Department’s notice, issued on September 30, alleges that Skoda Auto Volkswagen India imported almost complete cars in an unassembled state but declared them as “individual components” instead of completely knocked-down (CKD) units. This classification reportedly allowed the automaker to pay lower import duties, which range from 5% to 15%, instead of the higher 30%-35% tax applicable to CKD units. Models reportedly impacted by this alleged practice include the Skoda Kodiaq, Superb, Audi A4, Audi Q5, and Volkswagen Tiguan.
Authorities claim that shipments were intentionally split into smaller batches and cleared as individual components to avoid detection. The notice, comprising 95 pages, describes this as “a logistical arrangement” designed solely to misclassify imports and evade higher duties.
“This logistical arrangement is an artificial structure and nothing but a ploy to clear the goods without paying the applicable duty,” the Customs Department’s report states. The investigation further alleges that this practice allowed the automaker to gain an unfair competitive advantage in the market by reducing import costs.
Tax Shortfall of $1.36 Billion
The Customs Department’s investigation revealed that, since 2012, Skoda Auto Volkswagen India owed $2.35 billion in import duties. However, the company reportedly paid only $981 million, leaving a deficit of $1.36 billion (Rs. 11,000 crore).
If the allegations are proven, the automaker could face an additional penalty equivalent to the unpaid duties. This would bring Skoda Auto Volkswagen India’s total liability to $2.8 billion (approximately Rs. 24,000 crore). The case is being described as one of the largest tax demands ever issued against an automaker in India.
Evidence Uncovered During the Investigation
The Customs Department’s investigation intensified following inspections conducted at Skoda Auto Volkswagen India’s facilities in Maharashtra in 2022. Authorities reportedly confiscated documents, emails, and internal records from the company’s manufacturing units and offices. The evidence includes data from internal software systems used to place purchase orders.
The report claims that the automaker’s internal systems fragmented large shipments of car components into smaller batches, making it appear as though individual parts were imported rather than CKD units. In doing so, the company avoided the higher import duty applicable to CKD units.
The automaker’s Managing Director, Piyush Arora, was also questioned during the investigation. However, authorities claim that he was unable to provide a satisfactory explanation for why car parts required to assemble a vehicle were not shipped together as CKD units.
Comparisons with Competitors
The investigation highlighted that other automakers, such as Mercedes-Benz, complied with the CKD tax norms and paid the higher 30%-35% import duty for similar operations. In its report, the Customs Department rejected Skoda Auto Volkswagen India’s defense that its approach was intended to improve operational efficiency, labeling the claim as unfounded.
“The logistics involved in this process are a small and insignificant part of the overall operation,” the notice states, dismissing the automaker’s justification.
Skoda Auto Volkswagen India’s Response
In response to the notice, Skoda Auto Volkswagen India has stated: “We are 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.”
The company has been given 30 days to respond to the notice. It remains unclear whether the automaker will challenge the allegations in court or attempt to settle the case with the government.
Implications for Foreign Automakers in India
This case highlights the broader challenges faced by foreign automakers operating in India. The country’s high import taxes and intricate regulatory framework have long been a point of contention. Companies such as Tesla have criticized India’s steep import tariffs, while other foreign corporations, including Vodafone, have faced prolonged legal battles over tax disputes.
The Indian government has made it clear that it intends to enforce compliance with tax laws and ensure a level playing field for all automakers. By targeting high-profile companies like Skoda Auto Volkswagen, authorities are sending a strong message about the consequences of non-compliance.
Skoda Auto Volkswagen’s Position in the Indian Market
The allegations come at a time when Skoda Auto Volkswagen India is striving to improve its position in India’s competitive passenger vehicle market. Despite launching models tailored to local preferences, the automaker’s market share remains relatively small compared to competitors like Maruti Suzuki, Hyundai, and Tata Motors. In the luxury segment, the company’s Audi brand has consistently lagged behind market leaders like Mercedes-Benz and BMW.
The Road Ahead
If found guilty, Skoda Auto Volkswagen India faces not only financial repercussions but also reputational damage in one of the world’s fastest-growing automobile markets. The potential Rs. 24,000 crore penalty could severely impact the company’s operations in India and its ability to compete in the already challenging automotive sector.
This case also underscores the importance of regulatory compliance for multinational corporations operating in India. As the investigation progresses, it remains to be seen how Skoda Auto Volkswagen India will address the allegations and whether the automaker can mitigate the fallout from this high-profile tax dispute.
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