NEW DELHI (Reuters) - India has accused South Korea's Kia of evading taxes of $155 million by misclassifying component imports but the carmaker has denied wrongdoing, the latest fight by a foreign automaker with New Delhi over tariffs, according to a document and two sources.

Kia competes with Hyundai and Maruti Suzuki in the world's third-largest auto market, where it has a share of 6% of roughly 4 million units a year, and its Kia Seltos and Sonet SUVs are among the top sellers.

Foreign companies in India face headaches from high taxes and long-drawn-out investigations.

For example, Tesla has publicly complained about high taxes on imported EVs and Volkswagen last week sued over a demand for a record $1.4 billion in back taxes that it called "impossibly enormous".

Tax officers sent a confidential notice to Kia's Indian unit in April 2024, flagging alleged tax evasion of 13.5 billion rupees, according to a government notice Reuters is reporting for the first time.

The offence centred on incorrect declaration of imports of components for the assembly of the carmaker's luxury Carnival minivan, the notice showed.

In a statement to Reuters, Kia India said it made "a detailed response, supported by comprehensive evidence and documentation to substantiate" its stand and the authorities were still reviewing the matter.

Kia India is committed to complying with all regulations and has "consistently cooperated with" authorities, it added.

India's finance ministry and customs officials did not respond to Reuters queries.

In its 432-page notice, the government said tax authorities found Kia's Carnival "car model was being imported in parts or components in separate lots" via different ports, with the "intent to discharge lesser customs duty".

Kia devised the strategy to ensure the imports "could not (be) detected by customs," it added in the notice, issued by a customs commissioner in the southern city of Chennai.

Two sources said Kia's case was similar to that of Volkswagen, accused of evading a higher tax of 30% to 35% applicable on parts imported in "completely knocked down" or CKD form in a single shipment, instead shipping separate parts over days, making them eligible for a tax rate of just 10% to 15%.

During the investigation, Kia's website showed the Carnival model sold in India as being in "CKD" form, with retail sales of 9,887 units between 2020 and 2022, the tax notice said.

The Volkswagen investigation spanned 14 car models from the Skoda Kodiaq to the Audi A3 and the Volkswagen Tiguan.

In contrast, Kia's case concerns only the Carnival model, a seven-seater priced around $73,500, which is among its most expensive cars in India.

KIA COULD FACE $310 MLN PAYOUT

Indian tax rules could require Kia to pay up to $310 million if it loses the dispute, or roughly double the amount evaded, due to penalty and interest.

The latest available corporate filings in India show Kia's domestic annual sales of $4.45 billion in fiscal 2022/23 were its highest ever, up 53% on the year, for net profit of $243 million.

Last week, India slashed import duties on fully-built high-end motorcycles to 30%, in a move widely seen as looking to placate U.S. President Donald Trump, who has in the past called India a "tariff king".

But fully-assembled imported cars still attract a levy of more than 100%.

Kia has deposited 2.78 billion rupees ($32 million) "under protest" as it continues to fight the Indian tax notice, which is still proceeding, said a government source who declined to be named as the matter is private.

In 2022, authorities searched Kia offices and a factory in the southern state of Andhra Pradesh and took statements from India executives, some of whom the document identifies as Chief Procurement Officer Lee Sang Hwa, and Chief Finance Officer Kiho Yoo.

During the investigation, Kia executives "changed their stance and have made efforts to mislead," the tax notice stated, referring to statements on imports, manufacturing and taxation.

Kia was accused of importing more than 90% of the parts for Carnival, constituting a car in CKD form, which attracts higher tax, it added.

India's head of indirect taxes, Sanjay Kumar Agarwal, told Reuters the law was clear and some automakers were flouting it by not paying applicable CKD duties.

"If they are on the wrong side, then the department will have to issue a notice," he said in an interview on Tuesday.