India says quashing Volkswagen's $1.4 billion tax bill would be 'catastrophic'

New Delhi: India's government has told a court in Mumbai that agreeing to Volkswagen's demand to quash a $1.4 billion tax bill would have "catastrophic consequences" and encourage companies to withhold information and delay inquiries, court documents show.

India's highest-ever demand for back taxes related to import duties came after scrutiny of 12 years of Volkswagen shipments and has rekindled foreign investors' fears over lengthy investigations. The automaker has described the case as a "matter of life and death" for its India business, and is fighting the tax authority in the high court in Mumbai.

Volkswagen unit, Skoda Auto Volkswagen India, faces allegations that it misclassified component imports of some Audi, VW and Skoda cars to evade higher tariffs. Its key argument to quash the tax demand is the "inaction and tardiness" of tax officials in delaying shipment reviews.

The Indian tax authority told the high court in a 78-page rebuttal that Volkswagen caused the delays by withholding crucial information and data about its imports.

Accepting the carmaker's reasoning would allow importers to suppress vital information and then claim that the time-limit for the tax authority to conduct a probe had passed, the authority said in its March 10 filing, which was not public and is being reported for the first time.

This would have "catastrophic consequences", they said in the filing.

The case will be heard on Monday. Volkswagen and the Indian government did not respond to requests for comment.

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

Prime Minister Narendra Modi has been courting foreign investors with promises of simpler regulations and lower bureaucratic hurdles, but lengthy tax investigations that can trigger lawsuits stretching over years remain a sore point.

Had New Delhi wrapped up its reviews earlier, Volkswagen has said, it could have challenged the findings or re-evaluated its import strategy. The tax notice sent in September 2024 puts "at peril the very foundation of faith and trust" foreign investors desire, it said.

In the latest government filing, the tax authority argues Volkswagen was submitting "information and documents critically required for" completing shipment reviews "only in tranches".

The Indian government wants the court to direct Volkswagen to follow procedures and respond to its tax notice by engaging with the authority, and not before judges, the filing showed.

The tax authority alleges that Volkswagen over several years imported auto parts in separate shipments to evade detection and cut taxes, instead of declaring items as "completely knocked down" (CKD) units to be reassembled in India.

CKD units are taxed at rates of 30 per cent-35 per cent, compared to around 5 per cent-15 per cent for auto parts.