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The investigation into car companies such as Volkswagen and Kia for allegedly evading India’s customs duties while importing components needed to assemble cars, started nearly three years ago in 2022, on account of the automakers allegedly “misclassifying” components for completely knocked down, or CKD, units, a top Finance Ministry official said Thursday.
Two different customs notices were sent to carmakers Volkswagen and Kia, with a tax demand of $1.4 billion and $150 million, respectively, for allegedly importing components for a car in CKD condition in different lots, and misclassifying them as individual components, which attracts a lower customs duty. The notice was sent to Kia last April by the Customs Office in Chennai, and the one to Volkswagen was issued in September by the Office of the Commissioner of Customs in Maharashtra.
A duty of 30-35 per cent is applicable on parts imported in CKD form in a single shipment, whereas importing them separately as individual parts attracts a lower tax rate of 10-15 per cent.
Completely Knocked Down cars (CKD) are vehicles that are shipped in parts and assembled at the factory. Conversely, Completely Built Units (CBU) are vehicles that are shipped in one piece and do not need to be assembled.
“In these cases, the investigations started in 2022 and it was generally noticed that the imports were split into multiple consignments, whereas these were falling in the category of a car in CKD condition and the rate applicable to CKD condition was leviable,” Sanjay Kumar Agarwal, chairman of the Central Board of Indirect Taxes and Customs (CBIC), told The Indian Express in an interview. “Some automobile companies were paying the rates applicable to CKD condition, (but) some car companies, for certain models imported in CKD condition. (This) means all the main parts were imported and assembled in India… So the rate on CKD was higher than the individual components. Accordingly, notices have been issued, but it is a culmination of investigations which were initiated in 2022,” Agarwal added, when asked about the tax demand notices being sent to companies such as Volkswagen and Kia. In a statement to The Indian Express, a spokesperson for Skoda Auto Volkswagen India Pvt Ltd (SAVWIPL) said, “SAVWIPL is availing itself of all legal remedies in response to the showcause notice as permitted under the law. SAVWIPL is committed to operating as a responsible organisation, ensuring full compliance with all applicable global and local laws and regulations. Compliance with regulatory requirements is one of SAVWIPL’s fundamental principles, and we are cooperating fully with the authorities on this matter.”
A spokesperson for Kia said that the company has “already filed a detailed response, supported by comprehensive evidence and documentation to substantiate our stand.” Agarwal clarified that not all car models of these companies have this issue. “It is only on certain models, which were imported in CKD condition, but the duty was paid as applicable to individual components, and not for CKD condition,” he said. Cars such as Volkswagen’s Tiguan, and those by its sister companies including Skoda Superb and Kodiaq, and luxury cars like Audi A4 and Q5 and Kia’s Carnival limousine are under the scanner over the classification of their imported parts, Reuters had reported.
“The government issued a notification a long time back, where a lower rate was provided if a car is coming under CKD condition for assembling in India. It is lower than the rate applicable on imports of a completely built unit (CBU), but higher than the (rate on) parts and components,” Agarwal explained.
Volkswagen has filed a lawsuit against the tax demand notices, saying that it will hamper the company’s business plans in India, and arguing that it used the imported components along with other locally made parts to build their cars.
