How India says Volkswagen evaded $1.4 billion in import taxes

NEW DELHI (Reuters) -India has alleged Volkswagen evaded $1.4 billion in taxes by "wilfully" paying lesser import duty on component imports, in one of the biggest cases of its kind in the country that adds to mounting difficulties the German automaker faces.

Here is how India taxes automakers on imports and what Volkswagen allegedly did, according to the government notice Reuters reported on Nov. 29.

Volkswagen has said it complies with local laws and is cooperating with Indian authorities. 

HOW INDIA TAXES AUTOMOBILE IMPORTS?

* To encourage domestic manufacturing, India levies an import duty of 35% on completely knocked-down units (CKDs) under which parts are imported as a kit and assembled into cars in local factories. 

* This compares to 100% duty on full vehicle imports, while individual components needed in local manufacturing can be imported at a rate of 5-15%.

WHAT DID VOLKSWAGEN ALLEGEDLY DO?

* Indian authorities allege Volkswagen evaded higher levies of 30-35% on CKDs by "mis-declaring and mis-classifying" imports as "individual parts" that attract lower duties of 5-15%. 

WHICH MODELS ARE AT THE HEART OF TAX EVASION?

* The allegations pertain to sales from Indian unit Skoda Auto Volkswagen. The models involved include Audi's A4, A6 sedan and Q5, Q7 SUVs, Skoda's Octavia and Superb sedans and Kodiaq SUV, as well as VW's Tiguan SUV. 

* Indian authorities said more than 97% of the parts for these cars are imported into India as individual components. 

WHAT IS NADIN, THE SOFTWARE USED FOR VW IMPORTS?

* Based on projections from the sales teams, the carmaker uses internal procurement software called NADIN to place orders for the cars, including the model specification and colour, that are to be assembled locally, authorities allege.

* A second software programme ProCKD tracks and manages the inventory at the carmaker's India assembly plant, where the same information is entered.    

* Using the information entered into both programmes, an order is placed for the required parts. NADIN breaks the order down into between 700 and 1,500 components required to assemble a car.     

* NADIN is connected to foreign suppliers of the three brands - Audi, Skoda, VW - in Germany, the Czech Republic and Hungary. The suppliers sent the individual parts to a "consolidation centre" for each brand from whence it was shipped to India.

HOW WERE SO MANY PARTS MATCHED AND PUT TOGETHER?

* Components were stamped with unique identification numbers that helped the production team at Indian factories to identify which part goes into which car. 

* A 17-digit alpha-numeric number was used for vehicle identification. A separate 16-digit number was used on some parts as an identifier to factory workers that they should be assembled together.

HOW DID THESE IMPORTS REACH INDIA?

* The imports reached Indian ports as multiple consignments under multiple invoices but all within three to seven consecutive days of each other. The car body is supplied along with major components, and the rest comes in different consignments to avoid detection, the authorities alleged.

* The company says this logistical model is adopted for efficiency, but authorities said the carmaker "intentionally" used it to avoid paying higher tax.

(Reporting by Aditi Shah and Aditya Kalra; editing by Barbara Lewis)