India, March 24 -- The Customs department has said that agreeing with Volkswagen's demand to quash its $1.4 billion tax bill would have "catastrophic consequences," encouraging companies to withhold information and delay inquiries.

German automobile manufacturer Volkswagen's key argument to quash the tax demand is the "inaction and tardiness" of tax officials in delaying shipment reviews, according to a report by news agency Reuters.

The scrutiny of 12 years of Volkswagen shipments resulted in India's highest-ever demand for back taxes related to import duties, which the company has called as a "matter of life and death" for its India business.

This is because Volkswagen unit, Skoda Auto Volkswagen India, is now facing allegations that...