Indian Government Probe Focuses on Underpaid Duties

MUMBAI – Indian authorities are investigating whether some auto makers are evading customs duties that one tax official says could total Rs20 billion ($363 million).

The current inquiry focuses on BMW India, which allegedly underpaid customs duties by Rs5 billion ($91 million) and could face a fine of Rs6.5 billion ($118 million).

A finance ministry official says the Central Board of Excise & Customs has reason to suspect that BMW India since 2011 “has been importing consignments of semi-knocked-down car engines and transmissions that attract duty at 30% but declaring them as complete-knocked-down car parts and paying duty at 10% only.”

A BMW India spokesman confirms the auto maker’s plant in Chennai recently was inspected, “and we have cooperated with the authorities.”

The Chennai facility assembles the BMW X1 compact cross/utility vehicle, X3 compact SUV and 3-Series, 5-Series and 7-Series sedans. Assembly of 1-Series C-segment cars likely will start there soon. Four other models are imported as completely built-up units.

“Half of our engines and transmissions are assembled here in India,” the spokesman says. “We are also enlarging the facilities for assembling the rest of them. There is, therefore, no question of importing SKD (vehicles) and clearing them as CKD” in paying duties.

The tax agency also has served Honda India with a show-cause notice demanding Rs1.64 billion ($31 million) in allegedly underpaid excise taxes. The auto maker is accused of paying duties on the discounted sale prices of Brio hatchbacks and Jazz compact CUVs, which are much lower than their cost of production.

Discounts on Jazz prices ranging from Rs160,000-Rs175,000 ($2,900-$3,160) caught the attention of the tax authorities. The government may seek allegedly underpaid duties by other auto makers selling discounted vehicles for less than their production cost.

In addition to Honda, almost all of India’s major car companies – Toyota Kirloskar, Maruti Suzuki, General Motors India, Ford India, Tata, Hyundai India or Mahindra & Mahindra – have been cutting prices and offering discounts to attract customers in a declining market.

The issue stems from a 2012 India Supreme Court ruling upholding the tax agency’s demand for Rs3.6 billion ($68 million) in taxes and penalties from Fiat India and its Indian partner Premiere Auto for allegedly selling Uno minicars at a heavily discounted price since 1996.

Excise taxes were based on assessable value, which generally was accepted as the cost of production, until 2000, when the government began calculating the taxes based on transaction value. At that time, the transaction value was consistently higher than the cost of production.

As the current spate of discounts generally has dropped transaction values below production costs, the government wants to go back to basing excise taxes on production costs.

The government and industry associations are trying to agree on a formula. The Society of Indian Auto Manufacturers and the Confederation of Indian Industry have asked the finance minister not to raise taxes on auto makers that have curtailed sale prices. They also want the government to consider the reasons why some car companies are selling below cost.