India’s pain of economic transition: An unprecedented tax storm

Editor's note: Recently, the Indian government has consecutively imposed substantial tax bills on several foreign automotive companies. German car maker Volkswagen India faces a tax reassessment of $1.4 billion, setting a record in India, while South Korea’s Kia Motors has also received a tax demand totaling nearly $170 million. These staggering penalties have sparked a strong reaction within the global business community. This series of hefty penalties not only directly threatens the normal operations of the affected companies but also has raised significant concerns among international investors about the continued deterioration of India’s business environment.

The core focus of the current tax dispute is Volkswagen India. Indian tax authorities have accused the company of "using a loophole to pay less tax" by "breaking down imports of cars into separate components, instead of declaring them as completely knocked down (CKD) units," claiming that "Volkswagen India imported nearly complete vehicles in an unassembled condition".

In response to the $1.4 billion tax bill, Volkswagen has strongly refuted the accusations. The company argues that it informed Indian authorities in 2011 about its "part-by-part import" method and had received official clarifications supporting this approach. It warned that the government's sudden shift in policy interpretation would severely damage foreign investor confidence. Currently, Volkswagen has approached Bombay high court to challenge the "impossibly enormous" tax penalty and has cautioned that this dispute could jeopardize its $1.5 billion investment plans in India.

It is worth noting that this tax issue has already begun to affect Volkswagen India's daily operations. Reports indicate that more than 50 shipments of auto parts have been temporarily seized by customs, leading to disruptions in the dealers' supply chain. As a foreign car company with less than a 2% market share in India, Volkswagen generated $2.2 billion in sales in India last year, but its net profit was only $11 million. The severity of these penalties has raised doubts within the company about the stability of India’s investment environment.

Similar to Volkswagen's experience, South Korea's Kia Motors has also found itself embroiled in a tax crisis. The Indian tax authorities have accused Kia of "misusing" free trade agreement benefits and raised concerns over the classification of its parts imports, demanding nearly $170 million in back taxes. The emergence of these two cases has revealed significant uncertainty in the enforcement of India's tax policies, triggering widespread concerns among foreign businesses.

What's even more unsettling for foreign companies is India's longstanding reputation for high tariffs and protracted legal disputes. Take Vodafone, for example. After acquiring Hutchison Whampoa's Indian assets in 2007, the company was hit with a $2 billion tax bill. The dispute went through multiple stages, including a ruling by the Indian Supreme Court, legal amendments, and international arbitration, before finally concluding in 2020. Similarly, BP's Cairn Energy was asked to pay over $1.4 billion in back taxes following an internal restructuring in 2007, and the matter wasn’t resolved until 2021, when it reached a settlement with the Indian government. Furthermore, the French company Pernod Ricard is still locked in a tax dispute with the Indian government over $250 million, to the point where the company has even had to inform the Indian Prime Minister Modi, stating that "the long-running disputes have severely hindered its plans for additional investment in India".

These typical cases demonstrate that foreign companies in India often face tax disputes involving enormous amounts, with prolonged duration and uncertain outcomes, severely impacting normal operations and long-term investment decisions. Commentators have pointed out that in India, tax investigations often evolve into legal battles that drag on for years, becoming a major hurdle for foreign businesses and causing India to gradually become a "graveyard" for foreign investments.

Article by Chen Xiaoyang, Guangming Daily

Translated by Wang Xinyuan, Guangming Online

Find the original article at https://news.gmw.cn/2025-02/12/content_37845590.htm