The government of India has imposed a tax demand of a whopping Rs 25,000 Crore including the penalty for tax evasion
In a shocking turn of events, the government of India has imposed a tax demand of $2.8 billion (which roughly translates to Rs 25,000 Crore) from VW. That is the biggest penalty the Indian government has implemented on any carmaker in history. This is a massive amount even for one of the biggest carmakers on the planet. In fact, VW said that this amount could be a matter of life and death for the German brand. Let us glance at the details of this news here.
Government Poses Rs 25,000 Crore Tax Demand From VW
As per the news reports, it is being alleged that VW cheated the government by claiming CKD (Completely Knocked Down) units to be spare parts during the time of imports. Now, the CKD units attract a tax of 30-35%, while the spare parts are taxed at 5-15%. This resulted in massive savings for the German car marque simply by citing the CKD cars as spare parts. Hence, it had to pay an estimated tax of $981 million instead of $2.35 billion. Note that VW has been following this approach since 2011 and has already imported over 30,000 shipments. It has now been served a show-cause notice as well.
The German car marque’s lawyer argued in the Bombay High Court that this practice of importing parts and assembling them locally is followed by other manufacturers as well. He further mentioned that penalizing VW would set a dangerous precedent for other OEMs and turn India into a laughing stock. Interestingly, VW claims that it uses the same method to sell cars in Thailand, Mexico and Malaysia too. Now, since the alleged tax evasion amount is $1.4 billion (Rs 12,500 Crore), the penalty of 100% will take this amount to $2.8 billion (Rs 25,000 Crore). The carmaker is undergoing trail for this and we shall see what happens in this strange case in the coming days.
My View
This is a tricky matter which can have a strong impact on how things will operate in the Indian automobile industry going forward. While we can’t come to any conclusion without the necessary details and the knowledge of how these things work, we can only hope that an amicable solution is found which doesn’t negatively impact the growth in the automobile industry and doesn’t dissuade foreign carmakers from investing in India. I shall update this post once more details emerge.
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