Indian Automakers Taxed by Regulatory, Duty Disputes

MUMBAI – Indian automakers are facing dozens of legal entanglements that have created uncertainty, disrupted investment plans and production schedules and even hurt both sales and their image.

Fines, penalties and demands for unpaid excise taxes against the automakers currently total Rs49.5 billion ($825 million). Some cases date back a decade or longer.

The government of Haryana state has blocked Maruti Suzuki’s development of a Rs3.5 billion ($56.9 million) R&D center near its Gurgaon-Manesar-Rohatak facilities over a paperwork dispute.

India’s largest automaker obtained all environmental clearances for air and water pollution and hazardous waste at the 600-acre (240-ha) campus comprising a testing facility, technology-development center and fuel and emissions labs.

But it wasn’t until later that Haryana officials determined Maruti Suzuki needed permission for construction.The central government’s legal advisors said no such permission was required, but state officials are not convinced.

The change in government in Haryana after the recent elections might put the case on the back burner, allowing Maruti Suzuki to proceed with development of the R&D center. But for now, the project is on hold.

Another branch of the government put Maruti Suzuki on notice in September that accepting pre-launch bookings for the new Ciaz midsize sedan, without finalizing or revealing information on quality, specifications, standard equipment, price and other data was an illegal and unfair trade practice.

The automaker pointed out that Honda, Toyota, Mahindra, Tata, Hyundai, Ford and Chevrolet all follow similar practices. But the government threatened all of them with prosecution and rejected arguments the bookings were entirely voluntary and could be canceled without any penalty. The government wants to make a test case by pursuing the issue with the automakers.

In a third case involving Maruti Suzuki, a Tax Appellate Tribunal has demanded Rs8 billion ($135 million) in arrears, interest and penalties for alleged underpayment of taxes over a 5-year period.

The automaker sells its vehicles to dealers at an official price and pays excise taxes accordingly. The dealer then combines promotional expenses with discounts or other benefits to customers and the so-called handling expenses are recovered by Maruti Suzuki by adjusting them through the retailers’ margins.

The Tribunal contends this effectively allows Maruti Suzuki to sell the car at a higher price while paying excise taxes on the lower price.

Maruti Suzuki contends every automaker follows similar practice, and the government now wants to reopen all such cases and recover the alleged shortfalls. The matter has gone before higher courts and may take a decade to resolve.

In another tax case now in its fifth year, authorities are attempting to recover Rs6.5 billion ($110 million) from BMW for evading payment of excise duties. The vehicles were imported as semi-knocked-down units to be taxed at 30%, but the German automaker is accused of declaring the units as completely knocked-down imports subject to only a 10% duty.

Similar recovery notices to Honda, Fiat and Audi total Rs5.6 billion ($93 million).

The automakers argue the tax authorities do not understand the difference between SKD and CKD kits. Another five years may pass before the parties come to a common understanding.

In a case dating back 18 years, Fiat is accused of evading duty on the sale of the Uno minicar – a model no longer in production – costing Rs380,000 ($6,200). The automaker counters the tax cannot be revised once the vehicle leaves the factory.

Some of the cases may involve genuine grievances of consumers or justifiable actions of regulatory agencies. In the Competition Commission dispute, however, standard guidelines on what is taxable, and at what rates, must be established for the guidance of both the tax authorities and automakers.