In a stern warning to the automaker, the Indian government told a Mumbai court that quashing Volkswagen's demand to cancel a $1.4 billion tax bill would have "catastrophic consequences" and could encourage companies to withhold information and delay inquiries.

The tax demand—India's highest-ever for back taxes related to import duties—stems from a 12-year review of shipments by Skoda Auto Volkswagen India. The tax authority alleges that the carmaker misclassified component imports for Audi, VW, and Skoda models to evade higher tariffs. In its latest filing, the tax authority argued that Volkswagen intentionally submitted crucial data in separate tranches, thereby impeding timely shipment reviews. Accepting VW's reasoning, the filing warned, would allow importers to suppress vital information and claim that the statutory time limit for conducting tax probes had expired—a scenario that could have "catastrophic consequences" for regulatory oversight.

Volkswagen has described the case as a "matter of life and death" for its India business, contesting the tax authority’s findings by pointing to alleged inaction and tardiness by officials in reviewing its shipments. The carmaker contends that if New Delhi had completed its reviews earlier, it could have re-evaluated its import strategy or challenged the findings more effectively. The tax notice, issued in September 2024, has rekindled foreign investors’ concerns about prolonged and uncertain tax investigations in the country.

If found liable, Volkswagen could face a total tax bill of up to $2.8 billion, including penalties and delayed interest. The dispute comes at a time when Prime Minister Narendra Modi’s government has been actively courting foreign investment with promises of streamlined regulations and reduced bureaucratic hurdles. However, lengthy tax probes continue to be a sore point for international investors.

The case, which highlights the delicate balance between regulatory enforcement and investor confidence, will be heard on Monday. Neither Volkswagen nor the Indian government has responded to requests for comment.

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