Firm, not arbitrary

The government cannot overlook deliberate misclassification or revenue leakage. However, a demand covering imports dating back to March 2012 also tests the limits of belated tax assessments and the certainty businesses can expect from the country’s tax administration. Enforcement and predictability must go hand in hand. Volkswagen’s defence rests partly on a clarification issued by the Department of Revenue in March 2011 on the treatment of imported components.

It said standalone imports of pre-assembled engines, gearboxes, and other components, outside CKD-kit operations, would attract 10% basic customs duty. It did not exempt CKD kits from the higher duty, for which the government had specified separate conditions. The crucial question is whether its actual practices were consistent with what the clarification permitted. If the company fully disclosed its arrangements and met the stated conditions, the department must explain why it now considers that interpretation inapplicable.

Equally, Volkswagen cannot take shelter behind the clarification if its transactions fell outside its scope. The other important issue is limitation. Under Section 28 of the Customs Act, the normal period for recovering duty is two years, extendable to five years only in cases involving collusion, wilful misstatement, or suppression of facts. The department must first establish these statutory grounds convincingly.

Volkswagen says the demand reaches back nearly 12 years, more than twice even the extended period, making this a substantive legal question. The Bombay High Court, which had earlier reserved its judgment, released the matter in August 2026, and the case is now being heard afresh. The earlier bench had sought an explanation from the department on limitation but made no final determination. The fresh proceedings must now settle whether the demand can legally cover such a long period.

Allowing tax authorities to revisit transactions indefinitely would defeat the purpose of limitation periods and leave businesses exposed to liabilities long after commercial decisions have been taken. The dispute also comes as Volkswagen explores a proposed partnership with the JSW Group, making the potential liability relevant to the arrangement’s valuation and structure. More broadly, it bears on the government’s efforts to attract global manufacturers and encourage long-term investment in domestic production.

Investors must be held accountable for complying with the law, but they must also be able to rely on clearly communicated tax rules and their consistent application. The government is justified in pursuing revenue where it believes duties have been evaded, but it must show that its demands are evidence-based and legally sustainable. The sheer size of a demand is no substitute for proof of wrongdoing.

The outcome of this case will therefore matter well beyond one company and one industry. Tax administration must be firm on compliance, but equally disciplined in exercising its powers. Predictability in taxation is not a concession to business; it is essential for a credible investment environment.