India has leveled serious accusations against South Korea’s Kia Motors, claiming that the carmaker has evaded taxes amounting to $155 million through the misclassification of imported components. This latest dispute highlights the ongoing tensions between foreign automakers and New Delhi, which has been consistently tightening the screws on tariffs and taxes for international businesses. Kia, which competes directly with giants like Hyundai and Maruti Suzuki, holds a relatively small but important 6% share of India’s $4 million vehicle market, where its Kia Seltos and Sonet SUVs are among the most popular models. However, its battle with the Indian tax authorities over alleged tax evasion has the potential to shake the company's reputation and affect its operations in India, where it has made substantial inroads in recent years.
The case surfaced when Indian tax authorities issued a confidential notice to Kia's Indian unit in April 2024, accusing the company of using illegal methods to reduce its tax liabilities, specifically in relation to its luxury Carnival minivan. According to government documents, Kia allegedly misclassified its importation of car parts, intentionally breaking down the shipments of its luxury minivan into smaller imports that could bypass the higher customs duties imposed on fully assembled vehicles. The dispute centers around the claim that Kia shipped Carnival parts in separate lots through different ports, thereby reducing its tax burden by qualifying for lower duty rates.
The alleged strategy behind the misclassification was to avoid the 30% to 35% customs duty applicable to components imported in "completely knocked down" (CKD) form, a term that refers to parts that require further assembly in India. Instead, Kia opted to split the parts across multiple shipments, making them eligible for a lower tax rate of just 10% to 15%. This method allegedly ensured that Kia could bypass the higher taxes that would normally apply to the Carnival's CKD shipments, which are considered fully disassembled vehicles that require local assembly.
Kia has firmly denied the allegations, asserting that it has always complied with Indian tax laws and provided extensive documentation and evidence to support its position. The company stated that it has responded thoroughly to the government's queries and is fully cooperating with the authorities. While Kia maintains its innocence, the tax dispute has led to a significant investigation, with Indian authorities claiming that the company has engaged in deceptive practices to mislead customs officials.
The case has echoes of a similar dispute involving Volkswagen, which was accused of misclassifying parts to reduce the tax rate in India. In that case, Volkswagen was found to have split shipments of parts for multiple models, including the Skoda Kodiaq, Audi A3, and Volkswagen Tiguan, in a way that allowed the company to pay lower duties. However, in Kia's case, the investigation is centered solely on the Carnival model, which is priced around $73,500 in India and represents one of the most expensive vehicles in the company’s local portfolio.
According to the Indian tax authorities, Kia’s practice of declaring its Carnival model as a CKD vehicle on its website between 2020 and 2022, along with the 9,887 units sold during that period, raised suspicions. The notice accuses Kia of misreporting the importation of over 90% of the components for the Carnival as separate parts, which would have been eligible for lower duties if they were classified as semi-knocked down (SKD) shipments instead of CKD. The government’s claim suggests that Kia deliberately attempted to conceal the full scale of its imports by using deceptive methods to manipulate tariff classifications.
The tax dispute could have serious financial consequences for Kia, as India’s tax laws are strict, and companies found guilty of tax evasion could face substantial penalties. If Kia loses the dispute, it could be required to pay as much as $310 million, which includes back taxes, penalties, and interest. This is nearly double the alleged amount the company attempted to evade. The company has already deposited 2.78 billion rupees ($32 million) "under protest" as a temporary payment while the dispute continues to be resolved.
The carmaker’s sales performance in India has been impressive, with Kia’s revenue from the Indian market hitting a record high of $4.45 billion in fiscal 2022/23—an increase of 53% from the previous year. Despite this, the company now faces a major legal challenge that could tarnish its business image in one of the world’s fastest-growing automotive markets.
The controversy also comes at a time when trade relations between India and foreign automakers are under increased scrutiny. In an attempt to reduce trade tensions, India recently slashed import duties on high-end motorcycles to 30%, a move that appeared to be aimed at placating U.S. President Donald Trump, who has frequently criticized India’s high tariffs. However, India's duties on fully assembled imported cars remain substantially higher, exceeding 100%, fueling concerns among international automakers who feel that they are being unfairly penalized in the Indian market.
In the case of Kia, the company is not the only foreign automaker to face regulatory scrutiny in India. Volkswagen, in particular, faced a lengthy investigation involving multiple car models, and Kia’s Carnival is only the latest target of an extensive tax review. Authorities in India have also conducted searches at Kia’s offices and factory in Andhra Pradesh in 2022 and questioned senior executives such as Chief Procurement Officer Lee Sang Hwa and Chief Finance Officer Kiho Yoo. During these interrogations, the tax authorities claimed that Kia executives changed their stance on certain key issues, such as the classification of parts and manufacturing processes, and made attempts to mislead investigators.
Sanjay Kumar Agarwal, India’s head of indirect taxes, reinforced the country’s firm stance on tax compliance, stating that automakers who attempt to circumvent the law would face stringent action. He emphasized that the rules regarding CKD duties are clearly defined and that any attempt to flout them would not be tolerated. The government, he added, would continue to scrutinize foreign automakers to ensure that they adhere to the applicable tax laws.
This case highlights the broader challenges that foreign automakers face in navigating India's complex tax system. It also serves as a reminder that companies hoping to do business in India must carefully navigate the regulatory environment, especially in sectors like automotive manufacturing, where high import duties and complex regulations make compliance difficult for international companies. The outcome of Kia’s tax dispute will likely have significant implications for both the company and the wider automotive industry in India. If Kia loses, it could create a chilling effect on other foreign automakers, who might reconsider their operations in the country or be more cautious when it comes to making tariff-related decisions.
