BL Explainer. Will the GST demand on Infosys be followed by similar demands on other companies with foreign branches

What do the notices issued by the Karnataka State GST authorities and 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 the 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 incurred during FY18 to FY22. ‘The company was including the 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 report claims that this constitutes ‘import of service,’ wherein the supplier of the service is located outside India, the recipient of the service is located in India, and the place of supply of the 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 provider.

What was the trigger for the tax demand?

Infosys informed the exchanges that the pre-show cause notice relates to the GST demand for the period from July 2017 to March 2022. Tax experts opine that GST claims pertaining to the period 2017-18 cannot be raised after August 5. The department’s notice on July 31 could have been timed with this deadline in mind. Further, they also add that more claims related to that particular fiscal year are expected in the coming days.”

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 states that services provided by the overseas branches to the 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,” it said.

Where does the law stand on IGST liability for expenses incurred by Indian entities towards foreign branches?

A company establishes foreign branch offices for various reasons, such as research and development, procuring orders outside India, etc. In the case of transactions with such branches, the tax liability depends on the nature of services provided by the foreign branch. If the branch is acting as an intermediary or providing services related to goods sent outside India or services rendered outside India, then the place of supply of service is outside India, and the same will not be chargeable to GST. However, if the place of supply of the services is in India, it would be treated as an import of services and would attract IGST in the hands of the recipient.

However, recently, in its 53rd Council Meeting, the government issued Circular 210/4/2024, which clarified that if full input tax credit is available to the recipient, the value of supply as declared in the invoice or nil (in case no invoice has been issued) can be considered as the valuation. This circular helped resolve various disputes already raised by the department.

What stance has Nasscom taken?

The IT industry body Nasscom has come forward to support Infosys on this issue. In a statement, Nasscom has sought clarity on the issue from the Finance Ministry and said the demand made from Infosys reflects “a lack of understanding of the industry’s operating model.” It has called the demand an industry-wide issue, where multiple companies are facing “avoidable litigation, uncertainty, (and) concerns from investors and customers.”

Will the application of this rule result in GST demands on other Indian companies with branch offices as well?

Tax practitioners note that this demand is set to open a Pandora’s 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.