Volkswagen Retrospective Tax Litmus Test For Foreign Car Makers

As a result, India is now demanding a record US$ 1.4 billion in retrospective taxes, which could go up to US$ 2.8 billion after penalties. While providing a deep look at the complex nature of India’s import tax regime, this has turned the legal case into a litmus test for multinational corporations, especially foreign car makers in India.

Completely knocked down (CKD) unit imports attract 30-35 per cent duties, while components classified as separate parts face lower levies of 5-15 per cent. The authorities say Volkswagen used a loophole in the law to its advantage: It split bulk orders into smaller consignments and shipped them over a period of time using proprietary software, thereby reducing tax liability by US$ 1.36 billion over 12 years.

Different Framework

India’s customs framework differentiates CKD units from individual parts, with the former defined as “vehicles assembled from a kit containing all necessary components”. By importing 90-95 per cent of a vehicle’s parts in staggered shipments, Volkswagen arguably violated the spirit of CKD regulations, if not the letter.

The government’s 506-page court filing claims Volkswagen’s strategy was deliberate: The automaker imported “almost the entire car” in unassembled form but declared the shipments as non-CKD parts to avoid higher tariffs. Notably, authorities highlighted that 10 other automakers, including Mercedes-Benz and BMW, correctly classified similar “split consignments”, suggesting Volkswagen’s approach was an outlier.

Volkswagen claims its import model was transparent and consistent with clarifications provided by Indian officials in 2011. The company’s lawsuit in the Bombay High Court argues that the retroactive tax demand contradicts India’s policies and threatens its US$ 1.5 billion investment in local manufacturing. The case could severely hurt Volkswagen’s Indian operations, whose contribution to its global revenues is minimal, but its liabilities exceed its annual sales.

The Volkswagen dispute clearly shows that time and again, India’s retrospective tax enforcement has undone several gains the industry has made over time. While Kia is learnt to have corrected its classification practices following a 2022 investigation, it continues to contest a US$ 155 million demand for prior violations.

Tax authorities have, however, defended the delay in acting upon the case, claiming that the companies failed to submit the documents in time even though foreign firms argue that such extended timelines create unpredictability. For automakers operating on thin margins in India’s price-sensitive market, retroactive penalties could erode profitability and deter long-term commitments.

Regulatory Pressures

The tax crackdown coincides with stricter emissions enforcement. In 2024, eight automakers, including Hyundai, Mahindra, and Kia, faced penalties totalling US$ 900 million for exceeding Corporate Average Fuel Efficiency (CAFE) norms. While environmental compliance is non-negotiable, adding regulatory pressures—tax, emissions, and localisation mandates- on top of them has overwhelmed foreign firms.

Established players like Maruti Suzuki and Tata Motors benefit from deep localisation, shielding them from import tax vulnerabilities. In contrast, luxury brands and newer entrants like Volkswagen and electric vehicle maker VinFast rely heavily on imported components, making them disproportionately susceptible to tariff disputes.

South Korea’s VinFast, for instance, has urged the U.S. Government for concessions in EV tax credits while building a US$ 5.54 billion plant in Georgia, which shows that there is a way out while balancing regulation with investment incentives.

The Volkswagen case shows that India has aggressively pursued revenue mobilisation, which has resulted in US$ 7.3 billion in emissions penalties and US$ 1.4 billion in import tax demands since 2024. While these measures have added a substantial amount to the Indian exchequer, it may be at the cost of alienating foreign investors.

The Confederation of Indian Industry (CII) has warned that protracted disputes could impact Prime Minister Modi’s “Make in India” plans, particularly in high-value sectors like automotive and electronics.

In its defence, the company’ has claimed that the Indian Government endorsed its import model in 2011 only to reverse its stance 13 years later, which shows that the flip-flop policy won't do any good for the government's image while attracting more foreign investments.

Huge Incentives

With Western nations now set to restore manufacturing by doling out huge incentives like the U.S. reversing the earlier policy of importing goods, India faces increasing pressure to retain foreign capital.

The EU and Japan have already criticised protectionist policies, urging India to align with global trade norms. While India’s 100 per cent tariffs on fully built imports protect domestic industry, they conflict with its free-trade agreement (FTA) negotiations with the UK and EU, where automotive market access remains a sticking point.

Analysts said the proposed US$ 2.8 billion penalty, about 280 per cent of Volkswagen’s 2023-24 India revenue, can make any car maker rethink its India strategy. Even in the case of Kia Motors, despite correcting its operations, it continues to face a US$ 310 million demand for previous imports, which will hit its profits. In comparison, it has achieved a whopping US$ 4.45 billion in sales in FY23.

Economic Fallout

What India needs to do in circumstances such as these is to couple penalties with transition periods and more precise guidelines. India’s challenge lies in emulating this balance to avoid being branded a “tariff king”— a moniker former US President Trump used to criticise its protectionism.

While Volkswagen’s alleged violations warrant accountability, one must weigh the economic fallout of a maximalist penalty. A US$ 2.8 billion demand could force the automaker’s exit, costing jobs and deterring European investment amid India-EU FTA talks. 

Therefore, while India should penalise any deliberate evasion while acknowledging procedural delays, it should also make it clear to foreign automakers that compliance is non-negotiable. 

(The writer is a senior journalist who was earlier Associate Editor at Hindu Businessline. Views expressed are personal.)