Volkswagen has taken legal action against the Indian government to overturn a massive $1.4 billion (£1.1 billion) tax demand. This case could have wide-ranging implications for multinational corporations operating in India. The German automotive giant argues that the tax assessment is excessive and contradicts India’s established taxation policies on vehicle component imports.
The Root of the Dispute
The conflict arose when Indian tax authorities accused Volkswagen of misclassifying imported car parts to reduce duty payments. According to officials, Volkswagen imported nearly complete vehicles in a disassembled form—classified as Completely Knocked Down (CKD) units—which are subject to a higher 30-35% duty. However, Volkswagen allegedly declared these as individual components, reducing its tax liability to 5-15%.
Volkswagen, however, maintains that it followed all existing rules and had received clarifications from Indian regulators in 2011, allowing its “part-by-part import” approach. The company argues that the tax demand contradicts earlier guidance and undermines investor confidence in India’s regulatory environment.
Financial Impact and Operational Disruptions
A loss in court could have dire financial consequences for Volkswagen’s Indian operations. If additional penalties and interest are imposed, the company’s total liability could rise to $2.8 billion (£2.2 billion). This would be a significant setback for Volkswagen India, which reported revenues of $2.19 billion (£1.7 billion) in the last fiscal year, with a net profit of just $11 million (£8.5 million).
Additionally, the dispute has already disrupted Volkswagen’s business. In January 2025, customs officials in Mumbai detained over 50 air shipments of car components—including spare parts for premium brands such as Audi, Lamborghini, and Porsche. Although these were later released, the delays caused logistical challenges for dealerships, affecting vehicle servicing and customer satisfaction.
Volkswagen’s Legal Argument
Volkswagen insists that its imports should not be classified as CKD units, as the components are shipped separately and integrated with locally sourced parts during the manufacturing process. The company likens this to purchasing a chair in separate parts rather than as a single packaged kit.
Moreover, Volkswagen denies accusations of using internal software to manipulate import declarations for tax benefits. The firm maintains that its digital systems are designed to track consumer demand and streamline operations, not to evade taxes.
Broader Implications for India’s Business Climate
This case has significant implications for India’s business environment. The country has actively promoted its “Make in India” initiative, aiming to attract foreign manufacturers. However, retrospective taxation and regulatory unpredictability remain major concerns for global businesses. Volkswagen’s lawsuit underscores these challenges, highlighting the need for clear and consistent tax policies.
A ruling against Volkswagen could set a precedent for similar cases involving other multinational corporations, potentially deterring further foreign investment. Conversely, a decision in Volkswagen’s favour may prompt Indian authorities to reassess tax enforcement measures and regulatory transparency.
What Comes Next?
The High Court in Mumbai is set to hear the case on 5th February 2025. Volkswagen has requested an expedited review, arguing that prolonged uncertainty could further damage its Indian operations.
Industry leaders, economists, and investors will closely monitor the proceedings, as the verdict could shape India’s approach to multinational tax compliance for years to come. The outcome will determine whether Volkswagen can continue its expansion in India or if it will have to reassess its long-term strategy in one of the world’s fastest-growing automotive markets.
As this high-stakes battle unfolds, it remains to be seen whether India can strike a balance between enforcing its tax laws and maintaining an investor-friendly business climate.
