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In a dramatic turn of events, Infosys, the Indian IT behemoth, was slapped with a staggering GST demand of over Rs 32,000 crore by the Directorate General of GST Intelligence (DGGI) for alleged evasion between July 2017 and July 2022. The notice, issued on July 30, has sparked widespread controversy and calls of ‘tax terrorism’ from industry insiders.
GST Notice Withdrawn by Karnataka Government
In a surprising twist, the Karnataka government has since withdrawn the GST notice. Infosys revealed in a regulatory filing that state authorities rescinded the pre-show cause notice and instructed the company to submit additional information to the DGGI central authority. This development is part of an ongoing saga for Infosys, which has faced multiple tax notices over the years.
Understanding the Notice
The pre-GST notice alleged that Infosys failed to pay IGST on imported services as a recipient. The document specified that Infosys Ltd., Bengaluru, paid its overseas branches for services received and categorized these payments as branch expenses. According to GST laws, Indian offices and their overseas branches are considered separate entities, necessitating the head office to pay GST under the Reverse Charge Mechanism (RCM) for services received from foreign branches.
Under RCM, the recipient of goods and services pays the tax instead of the supplier. The authorities claim that Infosys’s overseas branches provide services to the Indian head office in return for reimbursed expenses, requiring the head office to pay GST directly to the government.
Infosys, however, maintains that it has met all its tax obligations. The company cites a recent circular from the Central Board of Indirect Taxes and Customs (CBIC) which clarifies that services provided by overseas branches to the Indian entity are exempt from GST.
Industry Reactions: ‘Tax Terrorism’ Allegations
The GST notice has sparked an outcry from the tech industry. Nasscom, the National Association of Software and Service Companies, has urged the government to clarify its stance, emphasizing that the notice reflects a misunderstanding of the industry’s operating model. Nasscom stated, “This is an industry-wide issue, causing avoidable litigation, uncertainty, and concerns from investors and customers.”
Former Infosys CFO Mohandas Pai has been particularly vocal, labeling the notice as ‘tax terrorism.’ He stressed that such actions could severely impact investments in India, calling for immediate intervention from the Finance Ministry.
A History of Tax Troubles
This isn’t the first time Infosys has faced tax scrutiny. In April this year, the company received a Rs 341 crore tax demand from the Income Tax Department for the assessment year 2020-21. Additionally, in September 2023, Infosys was hit with a Rs 26.5 lakh demand, a penalty of Rs 2.6 lakh, and an interest of Rs 8.6 lakh for delays in receiving foreign inward remittances.
Back in 2016, the Karnataka government issued a tax notice on houses built by Infosys for flood-affected individuals in Gulbarga district. The demand contradicted a Memorandum of Understanding (MoU) signed between the Infosys Foundation and the state government.
What Lies Ahead for Infosys?
With the recent withdrawal of the GST notice, the future remains uncertain for Infosys. According to Adarsh Somani, Partner at Economic Laws Practice, the issue extends beyond the IT sector, affecting various businesses operating under a head office-branch model in India. Several writ petitions on this matter are pending in high courts, and the outcomes are being closely monitored.
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