India’s tax service targets multinationals #IndiaFinance

Indian tax authorities have levied a series of huge tax bills against multinationals, undercutting Prime Minister Narendra Modi’s push to bolster the ease of doing business in the country and promote India as a manufacturing alternative to China.

In recent months, Volkswagen, Kia and Samsung were issued or have legally contested notices totalling more than $2bn, in an outstanding instance of what critics say are predatory practices by Indian tax authorities against foreign companies operating in the country that threaten to undermine business confidence.

The salvo also comes as Modi’s government has sought to improve the business environment in India, with moves such as cutting corporate tax rates and streamlining the country’s complex and often unpredictable revenue collection system.

But India’s unaccountable revenue officials remain steeped in a “socialist-era” culture where “businessmen were seen as crooks”, said Mohandas Pai, chair of Bengaluru-based venture fund Aarin Capital.

“We have a broken assessment system where tax officers can do what they want without proper reviews,” Pai added, noting that a proposed income tax bill would allow collectors to access emails, social media and cloud storage platforms without prior judicial approval. “There’s no check and balance.”

A senior tax lawyer who requested anonymity added: “The tax department is a law unto itself.”

India’s treatment of foreign companies has long been a sore point, with multinationals seeking to invest in the world’s most populous country and fastest-growing large economy having to fight red tape, onerous regulations and unanticipated tax bills.

New Delhi in particular is notorious for levying retrospective taxes. Vodafone and Cairn Energy spent years contesting one such multibillion-dollar claim, which they eventually won through international arbitration.

Part of the problem is “badly written laws and regulations open to interpretation,” said Pramit Pal Chaudhuri, practice head for south Asia at Eurasia Group. “Our laws are simply not up to the mark.”

A senior Mumbai-based tax lawyer and arbitrator, who also declined to be named for fear of antagonising tax officials, said India’s revenue system “red-flagged” certain cases for investigation but it was “completely opaque as to how and when they choose them”.

In the recent cases against Volkswagen, Kia and Samsung, Indian officials have accused the companies of evading import duties. One executive at a foreign carmaker grumbled that the “rules are not clear”.

The biggest battle is against Volkswagen, which is locked in a $1.4bn legal wrangle in Mumbai’s high court over whether it misclassified imports of car components as individual parts, rather than “completely knocked down” units for reassembly, in order to evade higher duties over a 12-year period.

The carmaker’s local arm has called the dispute a “matter of life and death”.

In court documents seen by the Financial Times, Škoda Auto Volkswagen India, the local subsidiary, insisted that it followed tax authority guidance, and argued that government officials “cherry-picked” evidence.

The company also warned that the tax demand “would lead to uncertainty” among multinationals by suggesting “that imports can remain provisional till eternity”.

Legal submissions by India’s government last month said the automaker’s attempt to dismiss the demand was “devoid of any merit” and could “have a cascading and potentially catastrophic impact on revenue collection”.

Škoda Auto Volkswagen India told the FT that it was “actively pursuing all legal remedies available to us under the law” and “remains committed to conducting business responsibly and in full compliance with all applicable laws and regulations”.

Samsung earlier this year was also hit with about $600mn in backdated levies and fines on individual executives over imported telecoms equipment. The South Korean conglomerate was likely to contest the claims, according to a person familiar with the matter who said the “confusion” was based on “a classification issue”.

“Tech is changing rapidly and globally, which leads to changes in nomenclature, changes in interpretation, but the customs commissioner in India hasn’t kept the technological changes in mind,” the person added.

Samsung and India’s finance ministry, which oversees the country’s tax and customs agencies, did not respond to requests for comment.

Kia said it was also fighting tax bills, adding that it was “committed to uphold all regulatory requirements”.

Maruti Suzuki, the Indian-listed arm of the Japanese automaker, said last month it would object to an additional $346mn bill for the financial year ending in March 2022.

The flurry of tax action flies in the face of the Modi administration’s recent efforts to ease Delhi’s historic heavy-handedness against foreign corporates.

Amid growing concerns, the government in November ordered all new customs investigations to be wrapped up within a year. Tax disputes, some more than a decade old, rose 27 per cent to Rs15.4tn ($180bn) in the two years to March 2024, according to finance ministry data.

Finance minister Nirmala Sitharaman has also pushed for reforms to cut regulatory burdens and simplify the income tax code, proposing in February to cut half of the 500,000-word 1961 income tax manual to improve “ease of doing business by providing a tax framework that is simple and clear”.

But at the same time, New Delhi is seeking to bulk up its coffers while cutting its fiscal deficit, estimated at almost 5 per cent of GDP. Many domestic companies have also been subject to tax penalties.

In recent weeks, India’s biggest airline IndiGo announced it would dispute a $110mn tax demand. Household goods majors Tata Consumer Products and Dabur India, along with food delivery platform Swiggy, also received notices totalling more than $60mn, which they planned to appeal against, the companies said.

“There’s always a tendency for such cases to increase when the government is pushing really hard for tax revenue,” said Chaudhuri. “The guys who raise that get a promotion.”