Volkswagen’s $1.4 Billion Indian Adventure: When ‘Knock Down’ Comes Back To Knock You Down

In what could be described as the automotive equivalent of assembling IKEA furniture without paying for the complete package, German auto giant Volkswagen finds itself in a rather awkward situation in India.
The company, already juggling flaming torches in the form of sales challenges, profit pressures, and labor disputes, has managed to catch the attention of Indian tax authorities – and not in a good way.
Imagine, You’re Volkswagen, commanding a whoppinggggg less than 2% of India’s car market (yes, you read that right), and you’re trying to expand your presence in the world’s third-largest automotive market. You’ve got grand plans, including a merger of three subsidiaries into Skoda Auto Volkswagen India and a billion-euro investment strategy dubbed “India 2.0.” Everything seems to be running smoothly until someone in the Indian tax department decides to take a closer look at your import practices.
The plot thickens when we get to the heart of the matter. Indian authorities have accused Volkswagen of pulling off what might be the automotive industry’s version of ordering a deconstructed salad to avoid paying the prix fixe menu price. According to a notice issued in September 2024, Volkswagen has allegedly been playing a rather creative game of “parts and parcels” with its imports, resulting in what authorities claim is a $1.4 billion tax evasion.
The crux of the dispute lies in a fascinating interpretation of what constitutes a “completely knocked down” (CKD) unit versus “individual parts.” While CKD units attract a hefty 30-35% import tax, individual parts can slip through with a mere 5-15% duty. Volkswagen, displaying what one might call “German efficiency,” apparently decided that importing “almost the entire” car in pieces was a brilliant way to navigate India’s tax landscape.
The tax authorities, however, weren’t particularly amused by this automotive jigsaw puzzle. In a 95-page notice (because nothing says “we’re serious” quite like a document longer than a novella), the Office of the Commissioner of Customs in Maharashtra essentially called out Volkswagen’s strategy as an “artificial arrangement” – bureaucrat-speak for “nice try, but no cigar.”
The numbers are nothing to scoff at. Since 2012, Volkswagen’s India unit should have paid about $2.35 billion in import taxes and related levies but only coughed up $981 million. That’s a shortfall of $1.36 billion, or as tax authorities might view it, enough money to make even the most stoic bureaucrat raise an eyebrow.
In response to this rather uncomfortable situation, Skoda Auto Volkswagen India has done what any self-respecting multinational would do: declared itself a “responsible organization” while simultaneously lawyering up. The company has filed a case in the Bombay High Court, essentially arguing that the tax demand is “impossibly enormous” – a technical term that roughly translates to “please don’t make us pay this.”
The plot took an even more interesting turn when some of Volkswagen’s air shipments were briefly held up at Mumbai customs, affecting spare parts supply to dealerships. Nothing quite says “we mean business” like holding up spare parts for luxury brands like Audi, Lamborghini, and Porsche. The delay lasted about two weeks, which in luxury car owner time is approximately forever.
Volkswagen’s defense is rather creative. They argue that since they didn’t import car parts together as a single “kit” but rather as separate components (which they later combined with local parts), they shouldn’t be subject to the higher tax rate. To explain their point, they’ve even drawn an analogy to buying a chair from Amazon – because apparently, there’s no difference between assembling a $20 chair and a $50,000 luxury vehicle.
The company also points out that they had kept the Indian government informed of their “part-by-part import” model and even received supportive clarifications in 2011. This raises the age-old question: Is it still a loophole if someone told you it was okay to use it?
As this automotive drama unfolds, Volkswagen warns that this dispute puts at risk its $1.5 billion investment in India and could harm the foreign investment climate. Meanwhile, the company continues to expand its lineup and plan future investments, presumably hoping that this tax issue will eventually go the way of last year’s models.
The irony of a company that specializes in automotive assembly getting into trouble over how it assembles its import strategy isn’t lost on anyone. As Volkswagen navigates this complex situation, one thing is clear: in the high-stakes game of international automotive business, sometimes the difference between a smooth ride and a costly detour comes down to how you define a “part” versus a “whole.”
For now, Volkswagen finds itself in the unusual position of trying to convince Indian authorities that the whole is not, in fact, greater than the sum of its parts – at least not when it comes to import duties. As the case winds its way through the Indian legal system, the automotive world watches with interest, perhaps wondering if this could be the most expensive game of “assembly required” ever played in the subcontinent.