JSW wants Volkswagen to bear $1.4 billion India tax bill in JV deal

India’s JSW Group wants Volkswagen AG to cover a $1.4 billion local tax liability, people familiar with the matter said, a sticking point that could upend a planned partnership seen as key to reviving the German carmaker’s fortunes in the world’s third-largest car market.

While a preliminary agreement has been reached between the two companies on a joint venture structure and other commercial terms, the partnership’s final valuation remains crucial as financial due diligence gets underway, said the people, asking not to be named as they aren’t authorized to disclose details about the negotiations.

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The treatment of a possible large tax bill are among the outstanding issues that could affect the deal, they said.

The deal under discussion involves JSW making an investment in closely held Skoda Auto Volkswagen India Pvt., with the Sajjan Jindal-led conglomerate seeking a majority stake. The proposed venture would develop, build and market passenger vehicles in India and for export, covering internal-combustion engines, battery-electric vehicles, plug-in hybrids and hybrids, according to a statement issued by JSW and VW earlier this month.

Skoda Auto Volkswagen India and JSW Group didn’t immediately respond to emails seeking comment.

VW has spent nearly two years looking for a local partner in India to share costs and risks after talks with Mahindra & Mahindra Ltd. broke down. The German automaker aims to crack into India’s vast, fast-growing car market, where it holds only a token share through its Skoda Auto unit, despite substantial investment in local manufacturing and the development of dedicated models over the past two decades.

It’s part of a broader turnaround strategy the Wolfsburg-based manufacturer is counting on to help pull it out of a prolonged slump.

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The looming tax issue stems from the Indian government’s allegation that VW misclassified some vehicle assembly kits imported from countries including Germany, Czech Republic and Hungary between 2012 and 2024 that reduced the levies it had to pay — a claim that the carmaker has denied. VW is challenging the tax demand before a court in Mumbai but the resolution is unlikely before the end of the year.

JSW executives’ position is that that any liability arising from the case pending before Indian courts should remain with the German automaker, according to the people. JSW has indicated that it would not proceed with the transaction if it were required to assume that financial burden, one of the people said, noting it could affect how the businesses being combined are valued and how much capital each partner ultimately contributes.

The stumbling block comes after VW suffered a blow earlier this month when Klaus Zellmer, Skoda’s chief executive, left to join Volvo Car AB as its CEO. Zellmer had been closely involved in the Indian partnership discussions and had said as recently as August that he expected to finalize a partnership with JSW later this year. His sudden departure, along with the tax issue, has slowed the pace of VW’s negotiations with JSW, according to people familiar with the matter.

The two sides had targeted signing a binding agreement by December, but the pace of the discussions will have to advance to meet it, said the people.