Indian tax authorities have collected a series of huge tax bills on multinational corporations, robbing Prime Minister Narendra Modi of the driving force to make it easier for them to do business in the country and to strengthen their promotion of India as a manufacturing alternative to China.
In the recent months, Volkswagen, Kia and Samsung have been issued or have issued notifications totaling more than $2 billion, or in the notable example of critics saying it is predatory practice by Indian tax authorities against foreign companies that threaten to undermine trust in their businesses.
Salvo was brought about by moves such as reducing corporate tax rates and streamlining the country’s complex and unpredictable revenue collection system as Modi’s government tried to improve India’s business environment.
But India’s uncalculated income staff remain ingrained in the culture of the “socialist era” that “businessmen were considered fraudsters,” says Mohandas Pai, chairman of Bengaluru-based venture fund Arling Capital.
“There is a broken rating system that allows tax officers to do what they want without proper review,” Pai added. “There’s no check and balance.”
The senior tax attorney who called for anonymity added that “the tax department is a law in itself.”
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The treatment of foreign companies in India has long been a painful point, with multinationals trying to invest in the world’s most populous countries, and the fastest growing large economy must fight against deficits, troubling regulations and unexpected tax bills.
New Delhi in particular is well-known for collecting retroactive taxes. Vodafone and Cairn Energy spent years on one of such multi-billion dollar claims.
Part of the issue is “there are awfully written with laws and regulations open to interpretation,” said Pramit Pal Chaudhuri, South Asia Principal of Eurasia Group. “Our laws simply don’t have marks.”
The Mumbai-based senior tax officer and arbitrator refused to be named for fear of hostility by the tax authorities, but said that India’s revenue system was “completely opaque” certain cases “wrapped in red” for investigation.
Recent incidents against Volkswagen, Kia and Samsung accused Indian officials of circumventing import obligations. One executive from a foreign automaker complained, “The rules are not clear.”
The biggest battle is said to be Volkswagen. This is trapped in a $1.4 billion legal dispute in Mumbai’s High Court over whether the import of auto parts was misclassified as individual parts rather than individual parts, rather than units that were “completely knocked down” for reassembly to avoid higher missions in 12 years.
The local arm of the automaker calls the conflict “the issue of life and death.”
Court documents seen by the Financial Times claimed that local subsidiary Skoda Auto Volkswagen India was following the guidance of tax authorities, claiming that government officials had “chosen” the evidence.
The company also warned that “reduces uncertainty” among multinationals by suggesting that “imports could remain tentative forever” and that tax demands “reduce uncertainty.”
Last month’s legal filing by the Indian government said last month that attempts to dismiss demand from automakers “has no merit” and “can have a cascade and potentially devastating effect on revenue collection.”
Skoda Auto Volkswagen India said it is “actively pursuing all legal remedies available under the law” and “responsibly and committed to fully complying with all applicable laws and regulations.”
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Earlier this year, Samsung was hit with taxes of around $600 million in individual executive backgrounds and fines through imported communications equipment. Korean conglomerates could challenge the claim, according to those familiar with the issue that said “confusion” was based on “classification issues.”
“Technology is changing rapidly and globally, leading to changes in nomenclature and interpretation, but Indian customs committee members do not have technology changes in mind,” added the person.
Samsung and India’s finance ministry, which oversee the country’s tax and customs agencies, did not respond to requests for comment.
Kia also fights tax bills and adds that he “promises to support all regulatory requirements.”
Marti Suzuki, the Japanese automaker’s registered arm for India, said last month he opposes an additional $346 million invoice for the fiscal year ending in March 2022.
The gusts of tax measures fly in the face of the recent efforts of the Modi government to ease the historic burden on foreign companies in Delhi.
Amid growing concern, the government ordered in November to close all new customs investigations within a year. According to Treasury data, the tax dispute over a decade ago rose 27% to Rs15.4TN ($180 billion) over the two years leading up to March 2024.
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Finance Minister Nirmala Sitharaman also proposed to drive reforms that reduce regulatory burdens and simplify the income tax code, reducing half of the 1961 income tax manual of 500,000 words in February and improving “ease of business by providing a simple and clear tax framework.”
But at the same time, New Delhi is trying to increase its financial resources in one lump sum, reducing its fiscal deficit, which is estimated to be nearly 5% of its GDP. Many domestic companies are also subject to tax penalties.
In recent weeks, India’s largest airline Indigo announced it would challenge $110 million in tax demand. Household goods majors Tata Consumer Products and Dabul India, along with food delivery platform Swiggy, received notifications totaling over $60 million.
“There’s always a trend towards such cases increasing when the government is really pushing hard for tax revenue,” Chaudhuri said. “The people who develop it are getting promotions.”
