Volkswagen India – Tax dispute is back, but this time it is different

Tax disputes with global companies is never new. This time around, it is a $1.2 billion tax dispute with Volkswagen India, where the DRI has penalized the company for deliberately under-invoicing imports to save on customs duty.

Volkswagen controversies – Remember 2015?

Controversies are as old as Volkswagen. Its biggest scandal rocked the world in 2015, when Volkswagen admitted to installing illegal software (defeat devices) in around 11 million vehicles over 16 years. The software cheated the emissions test and showed the cars as compliant, while actually emitting 40 times the legal limit of Nitrogen oxide. The scandal eventually resulted in a global clean-up. Criminal cases, civil suits, and vehicle buybacks; cost the company $33 billion. Apart from the losses, it showed the global giant in very poor light and had long-term repercussions on its global sales.

Indian story is also a Volkswagen Defeat Device

Defeat devices are nothing new for Volkswagen; and in the Indian context, it was another type of defeat device used. For its Skoda cars in India, Volkswagen was importing completely knocked down (CKD) kits and just assembling the final product in India. However, it used spoof software to show the imports as parts being brought in, instead of CKDs. Why this makes a difference? The tariffs on CKD kits are in the range of 30% to 35%, while the tariffs on parts are as low as 10% to 15%. By showing CKD kits as car parts, Volkswagen had substantially under-invoiced imports and paid lower customs duty. The $1.2 billion is the amount of customs duty underpaid, as per the DRI.

Both sides have put forth their arguments

The next hearing is schedule on 03-November and it could be an important case. From the Volkswagen side, the counsel has called the order time-barred. Legal cases and demands for compensation are only valid for last 5 years. However, what is interesting is that Volkswagen has not denied these allegations, which means they have under-invoiced the imports. The counsel for the government has argued that despite repeated attempts to get information, Volkswagen India had been less than cooperative with tax authorities. That was the reason for the delay. Since the delay was caused by Volkswagen, they cannot take recourse to the time-barred argument. We have to wait for 03-November.

DRI may have a strong case against Volkswagen

In the case of Cairn UK, India never had a strong case. Form versus substance argument came in later and Cairn UK had gone by the wordings of the DTAA as per the law in force. The case of Volkswagen is different. Firstly, Volkswagen has a history of Defeat Devices, as in the emission scam of 2015. Also, under-invoicing to save on customs duty is cheating the government of its rightful revenues. Remember, Volkswagen has not disputed the allegation. They have only called it time-barred. A defeat device cannot be time barred. It is not a loophole, but a deliberate gaming of the rules. The DRI has a very strong case, and India must take it to its logical conclusion. It will also send the right signal globally!