India has issued a notice to German automaker Volkswagen for allegedly evading $1.4 billion in taxes by “wilfully” paying lesser import tax on components for its Audi, VW and Skoda cars, a document shows, in what is one of the biggest such demands.

A notice dated September 30 says Volkswagen used to import “almost the entire” car in unassembled condition - which attracts a 30-35% import tax in India under rules for CKD, or completely knocked down units, but evaded levies by “mis-declaring and mis-classifying” those imports as “individual parts”, paying just a 5-15% duty.

Such imports were made by Volkswagen’s India unit, Skoda Auto Volkswagen India, for its models including the Skoda Superb and Kodiaq, luxury cars like Audi A4 and Q5, and VW’s Tiguan SUV. Different shipment consignments were used to evade detection and “willfully evade payment” of higher taxes, the Indian investigation found.

“This logistical arrangement is an artificial arrangement ... operating structure is nothing but a ploy to clear the goods without the payment of the applicable duty,” said the 95-page notice by the Office of the Commissioner of Customs in Maharashtra, which is not public but was seen by Reuters.

Volkswagen shares fell as much as 2.13% on the Frankfurt stock exchange after Reuters reported the India tax notice.

Since 2012, Volkswagen’s India unit should have paid import taxes and several other related levies of about $2.35 billion to the Indian government, but paid only $981 million, amounting to a shortfall of $1.36 billion, the authority said.

In a statement, Skoda Auto Volkswagen India said it is a “responsible organization, fully complying with all global and local laws and regulations. We are analyzing the notice and extending our full cooperation to the authorities.”

The notice asks to respond within 30 days, but Volkswagen didn’t comment if it has done so or not.

India's finance ministry and the customs department did not respond to Reuters queries.

News about the alleged tax evasion comes at a time when the Wolfsburg-based carmaker is fighting multiple battles at home and abroad. Volkswagen is locked in an escalating dispute with its labour in Germany over plant closures and layoffs while Chinese competitors are attacking Europe’s established carmakers on their home turf.

In China, Volkswagen’s biggest market where sales have been flagging, the carmaker said it will sell some of its operations, succumbing to years of mounting pressure.

The so-called “show cause notice” issued by the government authority asks Volkswagen’s local unit to explain why its alleged tax evasion should not attract penalties and interests under Indian laws, over and above the $1.4 billion evaded duties.

A government official who spoke on condition of anonymity said the penalty typically in such cases, if the company is found guilty, could go as high as 100% of the amount evaded, which could force the company to pay up about $2.8 billion in total.

High taxes and prolonged legal disputes have often been a sore point for foreign companies in India.

Electric vehicle maker Tesla, for example, has for years complained about high taxes on imported cars and Vodafone has fought cases related to back taxes.

Chinese automaker BYD also faces an ongoing Indian tax investigation for underpaying taxes of roughly $9 million on imports.

FACTORIES SEARCHED, EXECUTIVES QUESTIONED

Volkswagen has plans to invest $1.8 billion to build EVs and hybrids in Maharashtra and in February signed an agreement to supply India’s Mahindra with electric components. The group’s finance chief said in May he was “very positive about India”.

Still, Volkswagen is a tiny player overall in India’s 4 million units a year car market and has struggled to boost sales. The case can increase its headaches in India, where its Audi brand already lags competitors in the luxury segment like Mercedes, and BMW.

Indian investigators said in their notice that Mercedes was following the necessary rules to pay a 30% tax by importing the CKD units of their cars, and not separate the individual parts.

Inspectors searched three of Volkswagen India’s facilities in 2022, including the two factories in Maharashtra. Documents related to component imports and email backup of top executives were seized at the time.

The company’s India Managing Director, Piyush Arora, was questioned last year and asked “why all the parts required to assemble a car are not shipped together”, but “he was not able to answer this question,” the investigators said in the notice.

Arora did not respond to a Reuters request for comment.

USE OF SOFTWARE, MODUS OPERANDI

The Indian notice, based on review of the company’s internal software, said Volkswagen India regularly placed bulk orders for cars through an internal software which connected it to suppliers in Czech Republic, Germany, Mexico and other nations.

After the order was placed, the software broke it down into “main components/parts”, roughly 700-1,500 for each vehicle depending on the model.

Then, the supplies started.

The car parts were packed abroad in different containers within a span of three to seven consecutive days under multiple invoices, and then reached the Indian port roughly at the same time, Indian authorities alleged.

“This appears to have been done to pay lesser duties applicable on these individual parts,” the notice said, adding the carmaker “deliberately misled customs authorities”.

Volkswagen told investigators it was using such a route for “efficiency of operations”, but the argument was dismissed.

“Logistics is a very small and rather least significant step of the whole process ... (Skoda-Volkswagen India) is not a logistics company,” the notice said.