The controversy began when the Karnataka government sent a notice to Infosys, claiming the company was liable to pay Integrated GST (IGST) under the reverse charge mechanism for “supply of services” by its foreign branches from FY18 to FY22.
The information technology (IT) sector was recently shaken by a substantial Goods and Services Tax (GST) notice issued to Infosys. The Karnataka state authorities had sent a “pre-show cause” notice to the IT giant, demanding Rs 32,403 crore in GST claims.
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The notice has since been withdrawn, but it sparked significant concern within the industry, raising questions about the GST enforcement mechanism and its understanding of the IT sector’s operating model.
Initial GST Notice to Infosys
The controversy began when the Karnataka government sent a notice to Infosys, claiming the company was liable to pay Integrated GST (IGST) under the reverse charge mechanism for “supply of services” by its foreign branches from FY18 to FY22.
The revenue department’s interpretation was that expenses for overseas branches were payments for services delivered by the offshore offices of the Indian entity.
According to experts, this interpretation was contentious because it implied that reimbursements for expenses could be construed as payments for services, and that foreign branches were distinct legal entities from their Indian unit.
Industry outcry over Infosys GST notice
The issuance of such a substantial GST notice led to an outcry from the IT industry and experts.
The National Association of Software and Service Companies (Nasscom), an industry lobby group, criticised the notice. It stated that the notice reflected a misunderstanding of the IT industry’s operating model.
Nasscom highlighted that government circulars based on GST Council recommendations should be respected to avoid creating uncertainty and negatively impacting India’s ease of doing business.
“Recent media reports of a GST demand of over Rs 320 billion (Rs 32,403 crore) reflect a lack of understanding of the industry’s operating model. This is an industry-wide issue, and multiple companies are facing avoidable litigation, uncertainty, and concerns from investors and customers,” Nasscom said without naming Infosys.
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Nasscom also that GST enforcement authorities were issuing notices for remittance by Indian head offices to their foreign branches in cases where there was no actual service between the head office and the foreign branch.
This, according to Nasscom, was not a case of ‘import of service’ by the head office from the branch. The organisation pointed out that courts have previously ruled in favor of the industry in similar cases under the erstwhile service tax law.
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“This is not a new problem, and courts have been ruling in favor of the industry in these cases. This issue was even addressed during the erstwhile service tax law, where favorable judgments were delivered by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT),” Nasscom added.
A day after the initial notice, Infosys announced that the Karnataka state authorities had withdrawn the GST notice.
The company received communication that directed it to submit further responses to the Directorate General of GST Intelligence (DGGI).
The move has shifted the oversight of the tax probe to the DGGI.
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What do experts say?
Experts have voiced concerns about the potential precedent set by issuing such a large notice.
Rajat Mohan, director at accounting firm MOORE Singh, indicated that more tax notices for similar alleged violations could follow, particularly targeting multinational companies in the IT sector.
“The Karnataka GST Department’s decision to withdraw its tax evasion notice against Infosys marks a significant development. This notice, initially issued for alleged tax evasion, had been quashed by the Karnataka High Court, and the Supreme Court recently upheld this decision,” Narinder Wadhwa, Managing Director & CEO of SKI Capital, told IndiaToday.in.
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“The GST department should be careful when issuing such notices against large, reputable companies, especially those like Infosys whose major business is international. Allegations and reputational damage can significantly affect these companies’ business operations and market standing,” he added.
“For companies with substantial global business, such reputational losses can lead to a loss of client trust and potentially impact international partnerships and revenue streams.”
Meanwhile, tax professionals have suggested that the tax office may struggle to build its claim. Shreyas Sangoi, partner at DPS & Co, told The Economic Times that the proposed GST demand might not sustain since the Central Board of Indirect Taxes and Customs (CBIC) had clarified that when a foreign affiliate provides services to a related domestic entity, the value of services is considered nil, negating GST liability.
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Advocate Shailesh Sheth told the business daily that merely considering the overseas branch a distinct person and reimbursed does not equate to the supply of service. The basis and computation of the Rs 32,000-crore demand were also unclear. He referenced similar disputes involving companies like 3i Infotech and Kalpataru Power, where courts ruled in favor of the taxpayers.
What’s next?
While the withdrawal of the GST notice against Infosys marks an important development, the issue may not be entirely settled as the revenue department might pursue further legal action.
The incident calls for the need for a clearer understanding of the IT industry’s operating model by GST enforcement authorities to avoid unnecessary litigation and ensure market stability and investor confidence.
