Critical loopholes
The Bombay High Court’s recent decision to focus only on the issue of limitation in Volkswagen’s USD 1.4 billion tax dispute with Indian customs authorities is significant. The case has been dragging on for a long time. This raises concerns about regulatory efficiency and business confidence in India, apart from putting Volkswagen’s corporate demeanour under question.
The dispute mainly centers around customs authorities accusing Volkswagen of misclassifying its imports of Audi, Škoda, and Volkswagen vehicles as individual parts instead of Completely Knocked Down (CKD) units, which attract higher duties. Volkswagen argues that this claim, coming after 12 years, is time-barred. The company insists that it has consistently classified its imports the same way and even had a 2011 clarification from the revenue secretary supporting its stance. The customs authorities counter this by claiming Volkswagen withheld key details, justifying their delayed notice. The court has made it clear that it will only decide whether the customs authorities acted within the legal time limit when issuing the tax demand. If the show-cause notice is deemed too late, Volkswagen might win on technical grounds. But the government has indicated it could still take action under other provisions of the Customs Act if there was suppression of facts. Additional Solicitor General N Venkataraman has clearly stated that “Merely because you bring investment, it cannot be an erosion of sovereign space… We as a nation cannot compromise on sovereignty in taxation and regulatory matters.”
This case is about more than just Volkswagen. It highlights a critical issue in India’s tax system—how long should businesses be kept in limbo over their tax liabilities? If authorities can raise billion-dollar tax claims more than a decade later, it makes doing business in India unpredictable. Foreign companies investing in manufacturing want clarity and consistency, not surprise tax demands years after operations begin. There is a pressing need for the authorities to streamline the process in a manner that global multinationals do not take undue advantage of the system for such a long duration of time, and also do not fall prey to systemic lapses.
It is not to suggest global multinationals have no accountability to adhere to. Companies must also play fair. If Volkswagen indeed misclassified its imports, it should be held accountable. But enforcement needs to be timely and transparent. Past cases like Vodafone and Cairn Energy, where retrospective tax demands led to lengthy legal battles, already damaged India’s reputation. Repeating such instances will only hurt the country’s economic ambitions. India needs to create a fair and unambiguous ecosystem for the companies to thrive, while ensuring that no loopholes are left to be exploited by companies.
As India aims to become a global manufacturing hub, tax disputes like these need better handling. Authorities must ensure they enforce rules promptly, while companies should follow the law in letter and spirit. The Bombay High Court’s ruling will not just decide Volkswagen’s fate but also send a message on how India treats investors and enforces tax laws. The outcome will be closely watched, and its impact will go far beyond the walls of the courtroom.
