India singles out Volkswagen in $1.4 billion tax dispute, says Kia corrected course

Indian tax authorities have singled out Volkswagen as the only automaker to wrongly classify its car imports for 12 years to evade $1.4 billion in taxes, even as rival Kia changed its practice after being pulled up, court papers show.

Volkswagen is a tiny player in India's car market, which is the third biggest in the world, and its Audi brand lags luxury peers such as Mercedes and BMW. If found guilty it could face dues of $2.8 billion, including penalty and delayed interest.

The court fight over the record tax demand is a matter of "life and death", Volkswagen's Indian unit says. The highest import tax demand in India's history has also rekindled investor worries that lengthy disputes could stymie their plans.

India says Volkswagen used a clandestine scheme to import auto parts in separate shipments, to evade detection and cut taxes, instead of declaring items as "completely knocked down", or CKD, units that face higher taxes of 30% to 35%.

Rebutting Volkswagen's court plea, tax authorities listed 10 carmakers, from Mercedes-Benz to BMW and Hyundai , that correctly classified their imports, despite using "split consignments" to bring in parts.

South Korea's Kia fell in line after being warned, the authorities said in their 506-page filing, which is not public, but was seen by Reuters.

"Earlier, they were clearing such imports as parts, against which investigation was undertaken," the authorities told the court about the altered practice at Kia, which continues to fight a demand for $155 million in tax.

"Post the investigation, they have started classifying such imports correctly."

This month Reuters reported Kia was contesting a $155-million tax demand from 2024 for the similar import, in separate shipments, of parts for its Carnival luxury minivan. Kia says it is reviewing the matter and cooperating with authorities.

A senior Indian tax official, speaking on condition of anonymity, confirmed Kia had "accepted misclassification" and corrected its process, but cites a lengthy investigation period as justification for contesting the tax demand.

Volkswagen's domestic unit, Skoda Auto Volkswagen, Kia and India's tax department did not respond to queries from Reuters.

The Mumbai High Court is expected to decide within days the outcome of Volkswagen's challenge to its own tax demand.

Volkswagen blames India for taking as long as 12 years to review some shipment records, but tax authorities say the investigation delay came about as the company did not provide necessary documents in time.

The company has also argued the tax demand is contradictory to New Delhi's own tax rules on imports of car parts. Lawyers for the two sides have sparred in recent court hearings over how imports should be classified.

"Don't be the victim here," N. Venkataraman, India's additional solicitor general, said in court last week while criticising Volkswagen. "If you don't follow the law then we will initiate action."