The IT sector recently experienced a jolt with the issuance of a substantial Goods and Services Tax (GST) notice to Infosys by Karnataka state authorities. The initial “pre-show cause” notice demanded a staggering Rs 32,403 crore in GST claims, igniting widespread concern across the industry.
Despite the withdrawal of the notice, the episode has stirred significant apprehension, raising questions about the GST enforcement framework and its comprehension of the IT sector’s operational structure.
The controversy erupted when Karnataka issued a notice claiming that Infosys owed Integrated GST (IGST) under the reverse charge mechanism for “supply of services” by its foreign branches from FY18 to FY22. The revenue department’s stance was that expenses related to overseas branches should be viewed as payments for services provided by these offshore offices to the Indian entity.
This interpretation has been contested by experts, who argue that it incorrectly equates reimbursements of expenses with service payments and treats foreign branches as separate entities from their Indian counterparts. The issuance of such a massive GST notice led to a significant outcry from the IT industry and legal experts.
The National Association of Software and Service Companies (Nasscom) has criticized the notice, asserting that it stems from a fundamental misunderstanding of the IT industry’s business model. Nasscom stressed that adherence to government circulars, based on GST Council recommendations, is crucial to avoid creating uncertainty and adversely affecting India’s business environment.
Nasscom highlighted that such notices, demanding remittances for non-existent services between Indian head offices and foreign branches, are inconsistent with established practices. The organisation noted that courts had previously sided with the industry in similar cases under the former service tax law.
A day after the notice was issued, Infosys announced that Karnataka authorities had retracted it. The tax probe has since been transferred to the Directorate General of GST Intelligence (DGGI), which will oversee further investigations.
Experts have voiced concerns about the implications of issuing such a large notice. Rajat Mohan of MOORE Singh warned that this could set a troubling precedent, potentially leading to more tax notices targeting multinational IT companies.
Narinder Wadhwa, Managing Director & CEO of SKI Capital, emphasized that the withdrawal of the notice, which had been annulled by the Karnataka High Court and upheld by the Supreme Court, underscores the need for caution in issuing such notices. He noted that allegations and reputational damage could significantly impact a company’s operations and international relationships.
Tax professionals also suggested that the tax office may face challenges in substantiating its claims. Shreyas Sangoi from DPS & Co mentioned that the proposed GST demand might not stand, as the Central Board of Indirect Taxes and Customs (CBIC) had clarified that services provided by foreign affiliates to related domestic entities are considered to have nil value, thereby negating GST liability.
Advocate Shailesh Sheth pointed out that simply considering the overseas branch as a separate entity and reimbursing it does not constitute a supply of service. He also highlighted that the basis and calculation of the Rs 32,000 crore demand were unclear, referencing similar disputes where courts ruled in favor of taxpayers.
While the withdrawal of the GST notice against Infosys marks a notable development, the matter may not be entirely resolved, as further legal actions by the revenue department could still be on the horizon. This incident underscores the necessity for a more nuanced understanding of the IT industry’s operations by GST enforcement authorities to prevent unnecessary legal disputes and ensure market stability.
