In a late night development, Infosys  in a regulatory filing, said that it has received a communication from the Karnataka State authorities, withdrawing the pre-show cause notice and has directed the company to submit further response to DGGI  central authority in this matter.

The GST demand of over ₹32,000  crore served on Infosys had sent jitters through the IT industry that fears similar demands.

Industry experts had said that since the operating model of all major IT services companies is the same, the applicability of GST through the reverse charge mechanism (RCM) would be the same.

Industry body Nasscom has asked the Finance Ministry for clarity.

Nasscom said: “The recent media reports of a GST demand of over ₹32,000 crore reflect a lack of understanding of the industry’s operating model. This is an industry-wide issue and multiple companies face avoidable litigation, uncertainty and concerns from investors and customers.” The issue involves the applicability of GST through the RCM, it added.

The CFO of a mid-size IT firm, who did not want himself or his organisation identified, given the ‘sensitive nature of the issue’, told businessline, “It would be a mistake to see this as a company specific issue. What that company (Infosys) does and for which they are being targeted is an industry wide practice. It is Infosys today and it can be open season for anybody tomorrow. Which is why the industry should fight this collectively.”

Nasscom pointed out that this is not a new problem and that courts have been ruling in favour of the industry in such cases. “This issue was even addressed during the erstwhile service tax law, where favourable judgments were delivered by the Customs, Excise and Service Tax Appellate Tribunal,” it said.

CBIC clarification

Commenting on this, Amit Maheshwari, Partner at AKM Global, a tax and consulting firm, said the notice issued by the Directorate-General of GST Intelligence (DGGI) demands the payment of GST on expenses incurred by Infosys’ overseas branches, classifying these as imports of services under the RCM.

“Infosys referenced a recent CBIC clarification, stating that when a foreign branch provides services to its Indian counterpart eligible for full input tax credit, the invoice value is considered the open market value. And if no invoice is issued, the value can be deemed zero,” he said.

“This case highlights the need for clear guidelines and consistent interpretations to ensure compliance and prevent such disputes, reflecting broader challenges within the GST framework for multinational enterprises,” added Maheshwari.

‘Tax terrorism’

Calling this incident a ‘classic case of tax terrorism’, former Infosys board member and CFO Mohandas Pai told businessline, “It clearly shows the bent of mind of people in the Tax Department. The late Finance Minister Arun Jaitley had promised tax terrorism would be stopped, but it has only gone up.”

“Today, the biggest problem for businesses is high fee demands and tax disputes never get settled. Tax officials can easily raise the dispute without anybody questioning if they are wrong. Once they raise this appeal, we are left hanging in for 15-20 years. Look at the harassment, the reputation being harmed and all the unnecessary charges. We need deep reforms in tax disputes and settlement. What the government promised in 2014 is still not done adequately,” he added.

Some ambiguity

Omkar Tanksale, senior research analyst at Axis Securities, said, “There is some ambiguity between the parties. This is not a recurrent phenomenon but a one-time thing for Infosys. The company’s management declared it isn’t liable to pay the GST amount because they are foreign subsidiaries,” adding that in the worst-case scenario if Infosys is liable to pay, it will not threaten their business or affect their bottom line.

“Other IT companies will also try to eliminate threats by speaking with their tax consultants about their tax payable and take required action,” he said.

Related Topics