German automobile manufacturer Volkswagen’s key argument to quash the tax demand is the “inaction and tardiness” of tax officials in delaying shipment reviews, according to a report by news agency Reuters.

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What is the tax demand on Volkswagen about?

The scrutiny of 12 years of Volkswagen shipments resulted in India’s highest-ever demand for back taxes related to import duties, which the company has called as a “matter of life and death” for its India business.

This is because Volkswagen unit, Skoda Auto Volkswagen India, is now facing allegations that over several years, it 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.

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

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

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It also added that accepting Volkswagen’s reasoning would allow other importers to suppress vital information and then claim that the time-limit for the tax authority to conduct a probe had passed, according to the report which cited a March 10 court filing.

If found guilty, the company could face a tax bill of $2.8 billion, including penalty and delayed interest.

Volkswagen claimed that the tax notice originally sent in September 2024 puts “at peril the very foundation of faith and trust” foreign investors desire.

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This is at a time when Prime Minister Narendra Modi has been courting foreign investors with promises of simpler regulations and lower bureaucratic hurdles.

The case will be heard on Monday, March 24, 2025.