Volkswagen's India unit is embroiled in a significant tax evasion scandal, with the Indian government accusing the German automaker of evading $1.4 billion in taxes. The allegations center around the misclassification of car components imported for assembly, which allowed Volkswagen to pay lower import duties. This issue has brought Volkswagen's operations in India under intense scrutiny, as the company faces potential penalties that could double the evaded amount, reaching up to $2.8 billion.

The controversy stems from Volkswagen's practice of importing car parts as individual components rather than as completely knocked down (CKD) units, which attract higher import duties of 30-35%. By declaring these parts separately, Volkswagen reportedly paid only 5-15% in duties. This practice was allegedly used for models including the Skoda Superb, Kodiaq, Audi A4, Q5, and VW's Tiguan SUV.

The Indian customs department has issued a "show cause notice" to Volkswagen, demanding an explanation for the alleged tax evasion. The notice, which is not public but was seen by Reuters, accuses Volkswagen of creating an artificial logistical arrangement to avoid paying the appropriate duties. The investigation revealed that Volkswagen's India unit used a sophisticated software system to place bulk orders for car parts, which were then shipped in separate containers to evade detection.

Volkswagen has denied any wrongdoing, stating that it complies with all global and local laws. The company is currently analyzing the notice and cooperating with Indian authorities. However, the fallout from the scandal has already impacted Volkswagen's stock, which fell by 2.13% on the Frankfurt stock exchange following the news.

This case highlights the challenges foreign companies face in navigating India's complex tax regulations. High import taxes have been a longstanding issue for automakers in India, with companies like Tesla and BYD also facing similar challenges. The outcome of this case could have significant implications for Volkswagen's future in the Indian market, where it has struggled to gain a strong foothold.

Volkswagen's predicament is further complicated by the fact that its luxury brand Audi lags behind competitors like Mercedes and BMW in India. The company has plans to invest $1.8 billion in building electric vehicles and hybrids in Maharashtra, but this tax issue could pose a significant hurdle to its expansion plans.

The Indian authorities have been investigating Volkswagen since 2022, with searches conducted at the company's facilities and documents seized. The company's India Managing Director, Piyush Arora, was questioned about the import practices but reportedly could not provide satisfactory answers.

As the investigation continues, Volkswagen faces the possibility of severe penalties if found guilty. The case serves as a cautionary tale for other foreign companies operating in India, emphasizing the importance of adhering to local tax laws and regulations.