If you've been following us these past few weeks, you know that we are currently running a series on Bitcoin, hoping people better understand cryptocurrencies. However, this email isn't about bitcoin and no, we are not taking a break. You can actually read the full story from the bitcoin series by clicking on the link here.

However, there is a more pressing matter brewing right now and we figured you’d rather hear it from us than anyone else. So… 

In this bonus Finshots edition we see how one court case could change the automotive industry in India forever.

The Story

A couple of months ago, Indian tax authorities raised a staggering $1.4 billion demand against Volkswagen’s Indian subsidiary, Skoda Auto Volkswagen India — marking the largest import tax claim ever made by local authorities. 

And just yesterday, they raised another demand from Kia Motors, this time for $155 million.

For now, the German carmaker has sued tax authorities to contest the tax demand, while Kia Motors has denied all wrongdoing. But if the tax demands stick, this could blow the doors off India’s automotive market and change it completely. 

But to better understand this story we first need to start with a very high-level reconstruction of how a company like Volkswagen builds a car in India. 

Large automotive companies like VW rely on something called ERPs (e.g., SAP) to forecast, plan, and issue “bulk” purchase orders at the vehicle level. 

So if their Indian plant demands 1000 units of Skoda Kushaq, the software will automatically split each vehicle order into specific part codes for each sub-assembly or component, typically 700–1,500 items and the system will automatically routes purchase requests to appropriate Tier 1 suppliers around the world (e.g., Germany for powertrains, Czech Republic for body parts, Mexico for certain electricals).

The suppliers will then consolidate some of these parts into multiple containers under separate invoices and ship it to an Indian port (like Nhava Sheva/JNPT in Mumbai). VW will have to make sure that these parts arrive in the correct order (in 3–7 days). So timing is key. 

And once these shipments are cleared, they’ll make their way to the plant for assembly. 

And here’s where the problem starts. 

At this point, Volkswagen has a choice. They can either declare these components as individual parts or they could lump parts and components together and declare to custom authorities that the shipment is a CKD. 

CKD means “Cars Knocked Down”. 

Think of it like buying a dining table from IKEA: even if it arrives as separate boxes, they collectively make one complete piece of furniture. The same logic applies to a “knocked-down” car: if multiple boxes shipped together effectively form a full vehicle, it can be considered a single kit rather than just separate parts. 

And this distinction is very important. Because in India, CKD vehicle kits attract a significantly higher import duty — around 35% — whereas individual car parts used in domestic assembly lines often face lower duties (5% to 15%). 

And in all honesty, the government’s logic for imposing different duties on what is effectively the same end product is pretty fair.

When an automaker imports a vehicle in “knocked-down” form, most of the main assemblies — engine, transmission, chassis— arrive together, merely requiring a final round of assembly (often called “screwdriver assembly”). It doesn’t take a lot to “put it together”.

And the government should rightly impose higher duty on these kits because there’s minimal local value addition — the main modules are already built abroad and it doesn’t encourage domestic manufacturing. 

In contrast, if each subcomponent is imported separately, or sourced from various suppliers (including local ones), the local plant can add substantial value. They could stamp, weld, paint, and complete the final assembly right here and truly “Make in India”. 

So the lower duty on individual parts incentivizes automakers to invest in tooling, machinery, and workforce training to handle more of the manufacturing steps within the country.

But what if you were importing IKEA like cars (CKDs) but then declaring them as individual parts just to pay the lower duty (of 5–15%).

Well, that’s what this dispute boils down to. Tax authorities claim that Volkswagen imported nearly 97% of all their parts from outside India, even though most of these parts could be batched together as CKD. 

But wait…

We told you these parts didn’t arrive as kits. Instead, they arrived separately over a period of 3–7 days. So to declare them as individual parts is the appropriate thing to do, no?

Well…

Just because the parts were shipped at different times doesn’t mean they aren’t functionally a CKD kit. If each “part” declared by Volkswagen is part of a unified kit (e.g., engine, gearbox, chassis sections, interior modules) arriving consistently together, then they will all be treated as a part of a near-complete vehicle. 

And the obligation to accurately classify these shipments as “near complete vehicles” or “CKDs” falls squarely on Volkswagen. In fact tax authorities argue that Volkswagen (through the software) deliberately structured these shipments at different times to appear as though parts are individually imported.

They believe this is subversion–an attempt to deceive custom officials. 

So who’s right here? 

Well, that depends. 

If Volkswagen can show that their engine, gearbox and transmission mechanism came fully disassembled, and that there is significant sourcing and value addition locally, maybe they can put up a defence. But if the argument is that they are merely adding a few nuts, bolts, cables and hoses to assemble the engine and the gearbox, then the courts will likely see this as a CKD, even if the shipment was split into multiple invoices or containers. 

Volkswagen has also publicly stated that they’ve worked with tax authorities in the past to fully (and clearly) describe their “part-by-part import” strategy, receiving clarifications in support of it as far back as 2011. If that’s accurate, it puts the Indian government in a difficult position. Volkswagen can simply argue that the regulatory environment is unpredictable — similar to how other multinational firms (e.g., Vodafone, Cairn) once highlighted inconsistencies in India’s tax policies. It could become a global issue. 

All we can hope is that the parties can reach a settlement before it comes to that. 

Until then…

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