Explained: How Volkswagen Group Allegedly Evaded Billions In Taxes In India

New Delhi:

The Volkswagen Group, which include the brands Volkswagen, Audi, Skoda, Porche, and Lamborghini has been accused by Indian authorities of evading $1.4 billion (Rs 118.6 billion) in taxes, which is roughly Rs 11,865 crore.

The companies within the Volkswagen Group accused of import duty manipulation include the Indian unit Skoda Auto Volkswagen and the models of cars involved in the alleged scam include Audi's A4 and A6 sedans and Q5 and Q7 SUVs. It also includes Skoda's Octavia and Superb sedans, its Kodiaq SUV, and Volkswagen's Tiguan SUV.

Relevant authorities in India have claimed after detailed scrutiny that Volkswagen has deliberately and "wilfully" manipulated its import in such a way that it evaded a higher tax slab by categorising parts to be imported under a lower tax category. This is something Volkswagen has denied, saying it complies with all local laws and is cooperating with Indian authorities.

UNDERSTANDING THE IMPORT DUTIES

To promote local manufacturing, India levies an import duty of 35 per cent on Completely Knocked-Down units or CKDs. These are imported as a kit and then assembled into cars at the manufacturing plants across India.

For other parts of the vehicle that are manufactured locally, but require components within it to be imported, the import duty for such components varies from 5 per cent to 15 per cent.

Should a 'ready-to-drive' car be imported in its entirety from another country, 100% import duty is charged. This steep duty, imposed for decades, is credited behind auto manufacturing plants being set up in India.

WHAT VOLKSWAGEN ALLEGEDLY DID

Upon detailed scrutiny, Indian authorities have claimed they found that to bypass the 30-35 per cent import duty on CKDs, Volkswagen intentionally "mis-declared and mis-classified" its component imports by declaring them as "individual parts" - which, as mentioned above, attracts a much-lower import duty of 5-15 per cent.

The authorities claimed that over time, Volkswagen imported 97 per cent of all parts of the car models mentioned above by declaring them as "individual components", accumulating to nearly a billion-and-a-half dollars of import duty evasion.

HOW VOLKSWAGEN IMPORTS AUTO COMPONENTS AND PARTS

Volkswagen has an international inventory management system called NADIN for all its brands. It also has a separate software called ProCKD which it has developed to track and manage all inventory for manufacturing plants based in India.

Based on the feedback and projections sent by its sales and operations teams across India, the Volkswagen Group uses the these software - NADIN and ProCKD - to place orders for its various vehicle models across brands. This is how the manufacturing and assembly flow is managed.

Using the information entered in both software, an order is placed which NADIN then divides into a range of between 700 and 1,500 components which are necessary for a vehicle to be manufactured. The NADIN software is directly connected to international suppliers of three of Volkswagen's brands - Audi, Skoda, and VW - in Germany, Czech Republic, and Hungary.

Once these brands receive the orders for components from India, the suppliers in these countries send the parts  to a "consolidation centre" for each brand from where it is shipped to India. Components are stamped with unique IDs that helped the production teams in India to identify which part goes where in the said car.

A 17-digit alpha-numeric number is also printed on the parts to identify them for each vehicle. A separate 16-digit ID number was also given so that factory workers could know that these parts need to be assembled together before being installed in the car.

WHAT VOLKSWAGEN CLAIMS AS COMPARED TO AUTHORITIES

These individual parts mentioned above then reach various Indian ports as multiple consignments and multiple invoices, all separate from one another, but usually arrive on consecutive days within a week. Authorities claim that the vehicle body is supplied along with the main components and the rest of the parts arrive separately in different packages to avoid detection as CKDs.

Volkswagen says this is purely a logistical model which it has adopted over the years to improve efficiency. However, authorities call this "intentional and deliberate" to avoid paying higher import duties.

The notice sent by Indian authorities to Volkswagen Group has been accessed by news agency Reuters. If the allegations are proven correct, it would be one of the biggest cases of import duty evasion in India's history. It would also significantly impact the Volkswagen Group, which is already facing tough competition in the Indian auto market.