Karnataka Withdraws Infosys Tax Notice Amidst Central Review Considerations
On Thursday, the Karnataka state authorities made a significant move by retracting a pre-show cause notice issued to the IT giant Infosys, just a day after a hefty Rs 32,403-crore tax demand from the GST investigation department. Infosys, in a disclosure to stock exchanges, confirmed that the state authorities had rescinded the notice and directed the company to submit further responses to the central Directorate General of GST Intelligence (DGGI). This development has unfolded as industry stakeholders, particularly in the IT sector, express concerns about potential similar tax demands on other firms.
In light of these events, there is speculation that central tax authorities might review the GST notice issued to Infosys. The industry’s apprehension is evident, with Nasscom, an industry association, urging authorities to consider investor concerns about avoidable litigation and business uncertainties. An official source indicated that each case would be examined individually based on its merits, including whether it falls under the guidelines of a June 26 circular that provides clarity on the valuation of “supply of import of services” by a related person.
This circular stipulates that for importing services, the deemed open market value of transactions is nil if full input tax credit is available. However, whether Infosys qualifies under this provision remains to be evaluated. Moreover, such cases might be examined to determine if they stem from prevalent industry-wide trading practices, potentially allowing for treatment under the newly introduced Section 11A of the Central GST Act. This section, which the GST Council approved on June 22 and included in the Union Budget on July 23, enables tax authorities to waive dues arising from common industry practices, thus expediting the resolution of past disputes.
The tax demand on Infosys, pertaining to the period from July 2017 to March 2022, was issued just before the assessment for FY17 would become time-barred on August 5. Infosys had earlier responded to the Karnataka State GST authorities and is now addressing the DGGI regarding the notice issued on Wednesday. The notice claims that Infosys, by creating overseas branches to service clients, treated these branches and the company as “distinct persons” under the Integrated GST Act. Consequently, Infosys included expenses from overseas branches in export invoices from India, thereby computing eligible refunds based on those export values.
The DGGI asserts that Infosys paid consideration to these branches in the form of overseas branch expenses, making the company liable to pay GST under the reverse charge mechanism on supplies received from branches outside India. Infosys has maintained that GST was not applicable to these expenses and stated that all dues had been settled.
Nasscom has voiced strong support for Infosys, criticizing the tax notice as demonstrating a lack of understanding of the IT sector’s operating model. Nasscom emphasized that government circulars, such as the one issued to address this issue, should be honored to prevent uncertainty and negative impacts on India’s ease of doing business. The association stressed the importance of clear compliance obligations to avoid multiple interpretations that could hinder business operations.
Mohandas Pai, chairman of Aarin Capital and former CFO of Infosys, also condemned the notice, labeling it as “tax terrorism” and arguing that service exports from India should not be subject to GST. He criticized the potential for arbitrary interpretations by officials.
In conclusion, the retraction of the notice by Karnataka and the potential central review reflect ongoing efforts to address industry concerns and ensure clarity in tax regulations. The situation underscores the need for consistent and transparent enforcement mechanisms to maintain a conducive business environment in India.