What does the pre-show cause notice issued by the Director General of GST Intelligence against Infosys, say?
The Directorate General of GST Intelligence (DGGI) has alleged that IT major Infosys has evaded GST to the tune of ₹32,000 crore on import of services from overseas branches. DGGI’s report notes that Infosys is liable to pay GST under the reverse charge mechanism (RCM) for expenses of its overseas branches that it met during the period FY18 to FY22.
“The company was including expenses incurred towards overseas branches as part of their export invoice from India and based on the said export values, was computing the eligible refund,” the order read. DGGI thus claims that this constitutes ‘import of service’ wherein supplier is located outside India, recipient of service is located in India, and place of supply of service is in India.
RCM refers to the method by which the recipient of the services deposits GST to the government on behalf of the service provider.
Why have Karnataka GST authorities withdrawn their notice?
The state GST authorities first issued a pre show cause notice on Infosys and subsequently the company also received one from DGGI. Tax experts note that withdrawal of notice by state does not change anything for the company as they will now be answering to the DGGI on the issue. As per GST law, both state and the Central authorities cannot send notices for the same issue, and withdrawal by state authorities is to comply with this. This brings to light the need for a centralised GST assessment authority for large taxpayers or claims that has been a constant request of India Inc.
What was the trigger for the tax demand?
Infosys informed exchanges that the pre-show cause notice relates to GST demand for the period July 2017 to March 2022. Tax experts opine that tax demand for the year 2017–2018 gets time-barred by August 5 (in cases of suppression of facts by entities) and the department’s notice on July 31 could be timed with this deadline in mind.
What is Infosys’ stand on the issue?
The company says that as per regulations, GST is not applicable on these expenses. It also cites a recent CBIC Circular (circular number 210/4/2024 dated June 26, 2024) that clarifies that services provided by overseas branches to Indian entity are not subject to GST. “It is also important to note that the GST payments are eligible for credit or refund against export of IT services. Infosys has paid all its GST dues and is fully in compliance with the central and state regulations on this matter,” the company said.
Where does the law stand on IGST liability on expenses incurred by Indian entities towards foreign branches?
A company establishes foreign branch offices for various reasons such as R&D, procuring orders outside India,etc. In case of HO transactions with branches, tax liability depends on the nature of services undertaken by the foreign branch. In case the branch is acting as an intermediary i.e. acting in relation to goods sent outside India or the services rendered outside India then place of supply of service is outside India, and same does not attract tax. However, if the nature of expense is such that the place of supply of the services is in India, the same would be treated as import of services and would attract IGST in the hands of the Indian head office.
This issue around HO and foreign branch relationships has come up in the past with a few more cases against IT companies currently said to be in higher courts. To address such interpretation issues, the government recently issued Circular 210/4/2024 in June, which clarified that wherever input tax credit is available to the Indian entity, either service value shown on the invoice by the Indian business or NIL (in case no invoice is raised) is to be taken as market value for cross-border transactions with branches. This is assuming that no consideration is involved in the transactions with foreign affiliates.
However, tax experts note that GST department may or may not provide the benefit of this circular to Infosys depending on how it was accounting for transactions with branches and also based on the nature of the operations of the branches. “These facts need to be examined. Further, if the foreign branch is raising some debit note towards the Indian HO, then it may be seen as involvement of consideration and that could complicate things,” a tax auditor said.
Will application of this rule result in GST demands on other Indian companies with foreign branches?
Tax practitioners note that this demand is set to open a Pandora box of such claims on entities across sectors that have foreign branches. “The applicability of GST under RCM will arise in all the cases in case the transaction is covered under the purview of import of services. Thus, it is a wake-up call for all the industries with branch offices or having international transactions to review those transactions and ensure proper compliance so as to save themselves from huge tax liabilities coupled with interest,” Shivam Mehta, Executive Partner, Lakshmikumaran & Sridharan attorneys, said. Reuters also reported on Thursday that tax authorities say notices are likely to be sent to other companies. Interestingly, tax experts note that even in the case of Infosys it is only a pre-show cause at this stage and the authorities have not raised a demand.