The Karnataka government has withdrawn its Rs 32,000 crore tax notice to Infosys, but the controversy is far from over. A day after Infosys acknowledged receiving a notice for alleged evasion of over Rs 32,000 crore ($3.8 billion) in integrated goods and services tax ( IGST ), the company reported in a late evening exchange filing on Thursday that the Karnataka State authorities had withdrawn the pre-show cause notice.
Infosys has been directed to submit a further response to the Directorate General of GST Intelligence (DGGI) central authority.
Sources indicate that the DGGI will now handle the probe against the company. “If the company is investigated by both the state and central GST departments, an issue of double jeopardy could be raised, hence the state body has withdrawn its case. The DGGI, which has also issued a pre-show cause notice, will decide the case,” said a senior official.
Industry associations and tax practitioners have criticized the tax notice to Infosys, questioning the claim. Nasscom, the industry body, stated that the GST enforcement mechanism lacks an understanding of the IT industry operating model. The initial communication from the department could escalate into a full-fledged show cause notice only after approval from the apex indirect tax body CBIC, providing a potential reprieve for Infosys and other IT firms identified by the department.
Sources added that over half a dozen IT services companies based in Delhi-NCR, Hyderabad, and Bengaluru are facing similar preliminary notices from the GST office. These companies are all in the Information Technology (IT) and Information Technology Enabled Services (ITES) sectors.
The notice to Infosys is based on the revenue department’s interpretation that expenses towards overseas branches are payments for services delivered by the offshore offices of the Indian parent. The two key issues underlying the GST notice are whether reimbursement of expenses of foreign offices can be construed as payment for services, and whether foreign branches are distinct, separate legal entities. GST is typically paid by the service supplier, but in certain cases, such as import of services, the tax liability shifts to the service receiver.
On July 30, the DGGI’s Bengaluru unit sent a pre-show cause notice to Infosys claiming that the company is liable to pay IGST of over Rs 32,403 crore for the years FY18 to FY22 under the reverse charge mechanism on “supply of services” by foreign branches. “Similar notices are expected to be sent by August 5, owing to the demand getting time-barred,” an official told ET anonymously.
Tax professionals believe it will be challenging for the tax office to support its claim. Shreyas Sangoi, partner at CA firm DPS & Co, stated that the proposed GST demand might not hold since the CBIC clarified in June that when a foreign affiliate provides services to the related domestic entity, the value of services is considered nil, resulting in no GST liability on the domestic entity. Also, GST demands for FY18 to FY19 cannot be raised now except in cases of fraud or suppression of facts.
Advocate Shailesh Sheth of SPS Legal remarked, “Merely because the overseas branch is considered a distinct person and is reimbursed, the supply of service cannot be presumed. The basis and manner of computation of the Rs 32,000-crore demand are also unclear.”
The department appears to be rushing to meet the August 5 deadline to raise the demand for FY18, said Sheth. The notice is incorrect in law and the issue stands settled by circular number 210/4/2024 dated June 26, 2024, said Parag Mehta, partner (indirect tax) at N.A. Shah Associates.
Infosys has more foreign branches compared to other IT firms that have subsidiaries. The branches are involved in marketing, collecting receivables, servicing clients, or paying salary and managing social security of employees transferred from India, which the GST authorities interpret as import of services, said a former CFO of an IT firm. Another senior ex-official suggested that such a pre-show cause notice could be for information collection.
The notice to Infosys resembles a previous issue concerning the export of services by local branches of foreign banks. “The controversy stems from the definition of import of services in the IGST Act, which does not mirror the export definition. Thus, the industry views services received from overseas branch offices as services to self, not to a distinct person,” said Abhishek A Rastogi, founder of Rastogi Chambers.
The department and the IT industry await the CBIC’s views. If show cause notices are issued to Infosys and other companies, they would have the option of appealing before the adjudicating authority (AA). If the AA rules in favor of the department, interest and penalty would be added to the basic demand.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
