(Bloomberg’s opinion) – Donald Trump wants a deal. One way to get him to have them is to get countries to roll out the red carpet for his government efficiency leader. At least, this is New Delhi’s chances to assess its early release from a reciprocal tariff threat from 26%.
Attracting Elon Musk to let Tesla Inc. sell its cars in the most prone country could pave the way for a trade deal with Washington. This could be a bargaining chip to search for cheap manufacturing locations and large markets with other global brands to get rid of the US-China alienation. India offers both. However, its bureaucracy is notorious for its own goals. Facing the opportunity of a generation, officials continue to miss the woods.
An unpleasant legal dispute with Volkswagen AG, which came to India with Skoda at the beginning of the millennium. It launched Audi and Volkswagen brands in 2007, and five years later Lamborghini and Porsche. It accounts for only 2% of sales. Nevertheless, the German automaker remains as it wants to develop the country as the basis for export. A report on the Indian news website shows that in almost all major markets, Volkswagen needs to be able to sell in Southeast Asia, Africa and the Middle East. Skoda exports 30% of cars made in India.
But the rude shock of a $1.4 billion tax bill (plus the potential of fines and interest) threatens the survival of its local operations. In the Mumbai High Court, the automaker raised “arbitrary and illegal” questions about tax demand, which its lawyers described as “life or death” issues.
Put it on the tariff structure. Mercedes-Benz AG and BMW’s luxury vehicles are fully built units or enter the world’s third largest automotive market in the form of knocking doors. The former attracts up to 110% import tax; the latter can be joined by paying 35% of the duties. That’s because putting them together creates local work.
However, there are gaps in the law. Each part can be imported by paying a tariff of 5% to 15%. This is to encourage local manufacturing and make the cost of after-sales service suitable for buyers. The crux of the authorities’ case against Volkswagen: It brought knock-on versions of Audi, Skoda and Tiguan sedans and SUVs and served as separate consignments and claimed they were part of it. In other words, multinationals discovered a loophole and drove the entire car.
The German automaker said the “impossible huge” tax bill it received in September dates back to 2012. This has exceeded the six-month statutory limit for completing such assessments. However, the customs department told the court that the delay was caused by the manufacturer’s local unit, which was later in sharing the information. Volkswagen said it could challenge the findings or reevaluate its import strategy if the government completes the review in a timely manner.
However, the advantages of legal cases are not as critical as timing. In the midst of serious uncertainty in trade, earning investment USD is much more important than customs income. Volkswagen provided 9 million vehicles worldwide last year, more than double the total sales of all automakers in India. A practical (and publicity) solution would be to leverage the state’s investigation of import practices to make German companies work on large manufacturing centers for electric vehicles.
Previous tax disputes with the UK Vodafone Group PLC made rap in India bad. The Volkswagen case could further damage its easy-to-hang out scorecard regardless of who ends up winning. Even the bench that heard appeals from German multinationals pointed out that purchasing the entire car as a single part was a “clever tax plan.” If only the government keeps it, then it’s getting Volkswagen to pay higher interest rates in the latest era.
India’s high car tariffs could soon become history thanks to Trump and Musk. It’s not just them. The European Union also hopes that its cars will not be on duty.
Given all this, there is little to be gained to claim a profit of millions of dollars in annual profits to increase the return tax of more than a billion dollars. Attorneys Audi and Porsche are already in the driveway – why risk thousands of good jobs in Volkswagen factories, technology centers and showrooms to create more for them?
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This column reflects the author’s personal views and does not necessarily reflect the opinions of the editorial board or Bloomberg and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering Asian industrial companies and financial services. Previously, he worked at Reuters, Straits Times and Bloomberg.
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