How a VW software lit a mega tax demand

At the heart of a $1.4 billion tax dispute between Volkswagen Group and the Indian government lies a piece of enterprise software, which the German group uses to source car parts from across the world.

- Neha Joshi & Nehal Chaliawala

The carmaker said in a court petition that, according to the government, instead of importing completely knocked down (CKD) kits paying 35% duty, Skoda Auto Volkswagen India Pvt. Ltd (SAVWIPL) used its software NADIN to break down vehicle orders into components and sub-assemblies. These were then imported at a lower duty of 5-15% and assembled locally into finished vehicles.

Mint has seen a copy of the petition filed in the Bombay High Court.

CKD implies importing all components of a car in an unassembled state, which can then be put together to get a functional vehicle.

The carmaker moved the Bombay High Court after the government demanded customs duty at CKD rates on these items imported over the last 12 years. The company says it uses NADIN worldwide to track demand and plan production, which the taxman has misconstrued as a means to circumvent tax laws.

Here is how it works: Once a customer orders a car, the dealer feeds its details into the software. The company's production planning team then uses this information to plan how many cars to make in a given period. The software then breaks down the order into constituent parts, and the carmaker orders them from suppliers, many of whom are based in Germany, the Czech Republic and Hungary. Both imported and locally made parts are put together at its Aurangabad factory to make the finished vehicle.

This is where the difference of interpretation with the tax authorities arises. The carmaker's petition says the taxman has incorrectly interpreted the software as a means to break down the order for a car into separate parts, which are ordered from hundreds of suppliers around the globe, to the same effect as ordering CKD kits, to save on custom duty.