(Bloomberg Opinion) — Donald Trump wants deals. One way to let him have them is for countries to roll out the red carpet for his head of government efficiency. At least, that’s how New Delhi is assessing its chances of an early release from the threat of 26% reciprocal tariffs.
Wooing Elon Musk to get Tesla Inc. to sell its cars in the most-populous nation might pave the way for a trade agreement with Washington. That could be a bargaining chip with other global brands scouting for cheap manufacturing locations and large markets to sit out the US-China estrangement. India offers both. Yet, its bureaucracy remains notorious for scoring own goals. Faced with a once-in-a-generation opportunity, officials continue to miss the woods for the trees.
Take the unsavory legal dispute with Volkswagen AG, which came to India at the turn of the millennium with Skoda. It introduced Audi and Volkswagen brands in 2007, and Lamborghini and Porsche five years later. It has just a 2% share of sales. Nevertheless, the German automaker is staying put because it wants to develop the country as a base for exports. Struggling in nearly all of its main markets, Volkswagen needs to be able to sell in Southeast Asia, Africa and the Middle East, according to a report in the Morning Context, an Indian news website. Skoda exports 30% of the cars it makes in India.
But the rude shock of a $1.4 billion tax bill — plus the potential for an equal amount in penalties and interest — is threatening the very survival of its local operations. In Bombay High Court, where the carmaker has challenged the tax demand as “arbitrary and illegal,” its lawyers have described it as a “life-or-death” matter.
Put it down to the tariff structure. Luxury vehicles of Mercedes-Benz AG and BMW enter the world’s third-biggest auto market as completely built units or in a knocked-down form. The former attract import taxes that are effectively as high as 110%; the latter are allowed to come in by paying 35% duties. That’s because putting them together creates local jobs.
There’s a gap in the law, however. Individual parts can be imported by paying a 5% to 15% tariff. This is to encourage local manufacturing and keep after-sales service costs bearable for buyers. And therein lies the crux of the authorities’ case against Volkswagen: It brought in knocked-down versions of Audi, Skoda and Tiguan sedans and SUVs as separate consignments and claimed they were parts. In other words, the multinational found a loophole — and drove a whole car through it.
The German automaker says that its “impossibly enormous” tax bill, which it received in September, stretches retrospectively to 2012. That’s well past the six-month statutory limit on completing such assessments. The customs authorities, however, have told the court that the delay was caused by the manufacturer’s local unit, which was late in sharing information. Volkswagen has said that had the government wrapped up its reviews in time, it could have challenged the findings or re-evaluated its import strategy.
The merits of the legal case aren’t as critical, however, as its timing. Amid grave uncertainty around trade, it’s far more important to earn investment dollars than customs revenue. Volkswagen last year delivered 9 million cars globally, more than twice as many as the combined sales of all automakers in India. A practical (and publicity-friendly) solution would have been to use the state’s investigation of its import practices to make the German company commit to a large-scale manufacturing hub for electric vehicles.
A previous tax dispute with Britain’s Vodafone Group Plc gave India a bad rap. The Volkswagen case could further damage its ease-of-doing-business scorecard, regardless of who ends up victorious. Even the bench hearing the German multinational’s appeal has remarked that sourcing a whole car as individual parts is “clever tax planning.” If only the government had left it at that, after making Volkswagen pay the higher rate for the latest period.
India’s exorbitant auto tariffs may soon be history thanks to Trump and Musk. And it isn’t just them. The European Union, too, wants its cars to enter India duty-free.
Given all this, there’s little to be gained by asking an operation that earns a few million dollars in annual profit to cough up more than a billion dollars in back taxes. The lawyers’ Audis and Porsches are already in their driveways — why risk thousands of good jobs in Volkswagen’s factories, technology centers and showrooms to create more work for them?
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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