Skoda Auto Volkswagen India is likely to face Rs. 24,000-crore fine

Skoda Auto Volkswagen faces a potential Rs. India’s Skoda, Volkswagen and Audi brands fined Rs 24,000 crore for allegedly evading taxes on imported auto parts through misclassification

The Indian government has accused Skoda Auto and Volkswagen India of evading import duties worth $1.4 billion (roughly Rs. 12,000 crore) over the past decade by misclassifying imported auto parts. If proven guilty, the carmaker could face a penalty of double the tax shortfall, which could amount to a total liability of Rs. 240 billion rupees.

Charges of misclassification and evasion

A notification issued by the customs department on September 30 said that Skoda Auto Volkswagen India imported almost complete cars in an unassembled state but declared them as “single components” and not as completely knocked down (CKD) units. This classification reportedly allows automakers to pay lower import duties, ranging from 5% to 15%, instead of the higher 30%-35% tax that applies to CKD units. Models reportedly affected by this alleged practice include the Skoda Kodiaq, Superb, Audi A4, Audi Q5 and Volkswagen Tiguan.

Authorities claim the shipments were deliberately divided into smaller batches and cleared as individual components to avoid detection. The 95-page notice describes it as “a logistical arrangement” designed solely to misclassify imported products and evade higher tariffs.

“This logistics arrangement is an artificial construct and is nothing more than a strategy to clear goods without paying applicable duties,” the Customs Department report states. The investigation further alleges that this practice gives carmakers an unfair competitive advantage in the market by lowering import costs.

Tax shortfall reaches $1.36 billion

An investigation by the customs department revealed that Skoda Auto Volkswagen India owes $2.35 billion in import duties since 2012. 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 additional penalties equivalent to unpaid tariffs. This will take Skoda Auto Volkswagen India’s total liabilities to $2.8 billion (approximately Rs. 24,000 crore). The case has been described as one of the largest tax demands ever filed against a carmaker in India.

Evidence discovered during the investigation

The investigation intensified after customs authorities inspected Skoda Auto Volkswagen India’s plant in Maharashtra in 2022. Authorities reportedly seized documents, emails and internal records from the company’s manufacturing units and offices. The evidence included data from an internal software system used to place purchase orders.

The report said the automaker’s internal system split large batches of auto parts into smaller batches, making individual parts appear to be imported rather than CKD units. By doing so, the company avoids the higher import duties that apply to CKD equipment.

The carmaker’s managing director Piyush Arora was also questioned during the investigation. However, the authority claimed that he could not provide a satisfactory explanation as to why the car parts required to assemble the vehicle were not shipped together as CKD units.

Comparison with competitors

The investigation highlighted that other car manufacturers such as Mercedes-Benz complied with CKD tax norms and paid higher import duties of 30%-35% for similar operations. In its report, the customs department rejected Skoda Auto Volkswagen India’s defense that its practices were aimed at improving operational efficiency, calling the claim baseless.

The notice noted that “the logistics involved in this process are only a small and insignificant part of the overall operation,” but dismissed the automaker’s reasoning.

Skoda Auto Volkswagen India’s response

Reacting to the notice, Skoda Auto Volkswagen India said, “We are a responsible organization and fully comply with all global and local laws and regulations. We are analyzing the notice and extending full cooperation to the authorities.”

The company has 30 days to respond to the notice. It’s unclear whether the automaker will challenge the charges in court or try to settle with the government.

Impact on foreign automakers in India

The case highlights broader challenges facing foreign carmakers operating in India. The country’s high import taxes and complex regulatory framework have long been a bone of contention. Companies such as Tesla have criticized India’s exorbitant import tariffs, while other foreign companies including Vodafone face protracted 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 such as Skoda Auto Volkswagen, the authorities are sending a strong message about the consequences of non-compliance.

Skoda Auto Volkswagen’s position in the Indian market

The charges come at a time when Skoda Auto Volkswagen India is trying to improve its position in India’s highly competitive passenger car market. Despite launching models tailored to local preferences, the automaker’s market share remains relatively small compared to rivals such as Maruti Suzuki, Hyundai and Tata Motors. In the luxury car segment, the company’s Audi brand has lagged behind market leaders such as Mercedes-Benz and BMW.

The road ahead

If found guilty, Skoda Auto Volkswagen India faces not only financial losses but also reputational damage in one of the world’s fastest-growing car markets. Potential Rs. The Rs 24,000-crore fine could severely impact the company’s operations in India and its ability to compete in an already challenging automotive industry.

The case also highlights the importance of regulatory compliance for multinational companies operating in India. It remains to be seen how Skoda Auto Volkswagen India will respond to the allegations as the investigation progresses, and whether the automaker will be able to mitigate the impact of the high-profile tax dispute.