Infosys has confirmed receiving a communication from Karnataka State Authorities withdrawing a ‘pre-show cause’ notice regarding a significant GST claim. The authorities have redirected Infosys to provide further responses to the Directorate General of GST Intelligence (DGGI) central authority.
This update was revealed in an exchange filing on Thursday, causing Infosys shares to trade 1% lower on Friday morning. The development follows the Karnataka GST authorities’ issuance of a Rs 32,403 crore notice to Infosys for services availed from its overseas branches over five years starting in 2017. Infosys contends that these expenses should not be subject to GST.
In the filing, Infosys clarified: “…the Company has also received a pre-show cause notice from the Director General of GST Intelligence on the same matter and is in the process of responding to the same.” The company referenced a recent Central Board of Indirect Taxes and Customs circular, aligned with GST Council recommendations, stating that services provided by overseas branches to Indian entities are not subject to GST.
Infosys asserted that its GST payments are eligible for credit or refund against IT service exports, stating, “Infosys has paid all its GST dues and is fully in compliance with central and state regulations on this matter.”
The GST authorities’ notice indicated: “In lieu of receipt of supplies from overseas branch offices, the Company has paid consideration to the branch offices in the form of overseas branch expense. Hence, M/s Infosys Ltd, Bengaluru is liable to pay IGST under reverse charge mechanism on supplies received from branches located outside India to the tune of Rs 32,403.46 crores for the period 2017-18 (July 2017 onwards) to 2021-22.”
The Directorate General of GST Intelligence in Bengaluru alleged that Infosys did not pay Integrated GST (IGST) on the import of services as a recipient, including expenses incurred by its overseas branches in export invoices without accounting for IGST under the reverse charge mechanism.
The tax demand, which exceeds Infosys’ annual profit, is significant. For the June quarter, Infosys reported a 7.1% year-on-year net profit increase to Rs 6,368 crore, with revenue from operations rising 3.6% to Rs 39,315 crore.
Nasscom Defends Infosys
Nasscom, the apex IT industry body, defended Infosys, stating that the tax demand reflects a misunderstanding of the industry’s operating model. Nasscom emphasized that government circulars based on GST Council recommendations should guide enforcement actions to prevent 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 stated without directly naming Infosys.
Nasscom argued that GST enforcement authorities have been issuing notices for remittances by Indian head offices to their foreign branches in cases where no actual service is provided between the head office and the foreign branch, which does not constitute an ‘import of service’ by the head office from the branch.
“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 concluded.
