The Indian government has issued a notice to Skoda Auto Volkswagen India for allegedly evading USD 1.4 billion in taxes by “wilfully” paying lesser import tax on parts for Skoda, VW and Audi cars, reveals a document, making it one of the biggest demands of this nature, Reuters reported.

As per the report, a notice dated September 30 states that Volkswagen used to import “almost the entire car” in an unassembled state. The import tax levied in India for completely knocked down units is 30-35 percent, but the company paid a much lower duty of 5-15 percent by “mis-classifying” and “mis-declaring” these imports as “individual parts”.

The news wire further said that these imports were made by VW’s India unit, Skoda Auto Volkswagen India, for models such as the Skoda Kodiaq and Superb, and luxury cars like Audi A4 and Audi Q5, and VW Tiguan. The investigation has found that different batches were shipped to avoid detection and “wilfully evade” higher taxes, Reuters noted.

“This logistical arrangement is an artificial arrangement ... operating structure is nothing but a ploy to clear the goods without the payment of the applicable duty,” said the 95-page notice by the Office of the Commissioner of Customs in Maharashtra. The notice is not in the public domain but was reviewed by Reuters. 

The authority noted that since 2012, VW’s India unit should have paid import taxes and levies to the tune of USD 2.35 billion to the Indian government, whereas it actually paid USD 981 million, leaving a USD 1.36 billion gap.

In a statement, Skoda Auto Volkswagen India said it is 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.”

A government official who spoke to Reuters on the condition of anonymity said that in such cases, the penalty could go to 100 percent of the evaded amount; the company could end up paying roughly USD 2.8 billion if found guilty.

Reuters further stated that VW is a small player in India's car market comprising 4 million units a year, and has faced challenges in bolstering sales. This adds to its woes, where its Audi brand is behind competitors BMW and Mercedes in the luxury space.

Inspectors searched three of Volkswagen India’s facilities in 2022, including the two factories in Maharashtra, said the Reuters report, adding that documents pertaining to component imports and an email backup of top executives were taken at the time.

The managing director of Skoda Auto Volkswagen India, Piyush Arora, was questioned last year and asked “why all the parts required to assemble a car are not shipped together”, but “he was not able to answer this question”, the investigators said in the notice.

Reuters could not elicit a response from Arora on this issue.

The notice, on the basis of the company’s internal software, said that Skoda VW India regularly placed bulk orders for cars via internal software, which connected it to suppliers in the Czech Republic, Mexico and Germany, among other nations.

As per Reuters, the authorities have alleged that after the order was placed, the software broke it down into “main components/parts”, roughly 700-1,500 for each vehicle, depending on the model. The car parts were packed abroad in different containers within a span of three to seven consecutive days under multiple invoices and then reached the Indian port roughly at the same time.

“This appears to have been done to pay lesser duties applicable on these individual parts,” the notice said.

Volkswagen told investigators it was using such a route for “efficiency of operations”, but the argument was dismissed. “Logistics is a very small and rather least significant step of the whole process ... (Skoda-Volkswagen India) is not a logistics company,” the notice said.