Infosys has announced that it has received a communication from the Karnataka State Authorities withdrawing the ‘pre-show cause’ notice related to a GST claim. The authorities have instead directed Infosys to submit a further response to the Directorate General of GST Intelligence (DGGI) central authority. This update was disclosed in an exchange filing on Thursday. Following this news, Infosys shares were trading 1% lower in early trade on Friday.
Context of the Notice
This development came a day after Infosys revealed that the Karnataka GST authorities had issued a notice for Rs 32,403 crore concerning services availed by the company from its overseas branches over the past five years, starting from 2017. Infosys contends that these expenses should not be subject to GST.
Infosys’ Response and Compliance
In its filing, Infosys stated that it had received a pre-show cause notice from the Director General of GST Intelligence on the same matter and was in the process of responding. The company also referenced a recent circular from the Central Board of Indirect Taxes and Customs, which aligns with GST Council recommendations, indicating that services provided by overseas branches to Indian entities are not subject to GST. Infosys affirmed that GST payments are eligible for credit or refund against the export of IT services and that the company has paid all its GST dues, fully complying with central and state regulations.
Details of the GST Authorities’ Notice
The GST authorities’ notice to Infosys indicated that, due to receipts of supplies from overseas branch offices, the company had paid consideration to these branches in the form of overseas branch expenses. Consequently, Infosys was deemed liable to pay Integrated GST (IGST) under the reverse charge mechanism on supplies received from branches located outside India, amounting to Rs 32,403.46 crore for the period from July 2017 to 2021-22.
Allegations and Financial Impact
The Directorate General of GST Intelligence in Bengaluru alleged that Infosys did not pay IGST on the import of services as a recipient. The claim was that Infosys included expenses incurred by its overseas branches in its export invoices without accounting for IGST under the reverse charge mechanism. This tax demand is significant, equating to more than a year’s profit for Infosys. For the June quarter, Infosys reported a 7.1% year-on-year increase in net profit to Rs 6,368 crore, with revenue from operations rising 3.6% to Rs 39,315 crore.
Nasscom’s Defense and Industry Context
The apex IT industry body, Nasscom, has 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 be respected to avoid uncertainty and negative impacts on India’s ease of doing business.
Nasscom criticized the GST enforcement authorities for issuing notices for remittances by Indian head offices to their foreign branches, where no actual service occurs between the head office and the foreign branch. They argued that this is not a case of ‘import of service’ by the head office from the branch. Nasscom noted that similar issues have been addressed in the past, with favorable judgments delivered by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT).
