A recent ‘Incident Report’ issued by the Director General of GST Intelligence regarding non-payment of IGST (Integrated Goods and Services Tax) on import of services made headlines. This gained national attention because of two reasons — the amount involved was ₹32,603 crore and the company in the limelight was Infosys. Probably considering the negative publicity, it appears that the incident report has been withdrawn.
The Incident Report (which by itself is an interesting term for taxpayers used to show-cause notices and forms with numbers) was based on intelligence gathered by departmental officers. The report states that the company incurs expenses on overseas branches which should be treated as import of services under Section 2(11) of the IGST Act.
Comfort in a circular
Infosys and other industry bodies draw reference to Paragraph 3.4 of Circular No 210/4/24-GST, dated June 26, 2024, which states: “It is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.”
Since the value of the transaction is nil, tax cannot be demanded. It is also a fact that if tax is paid and input tax credit availed, it would still be revenue-neutral from the tax point of view. This forces one to ask the question as to why the incident report was issued.
A popular opinion seems to be that the tax department wanted to meet the drop-dead deadline of August 5, 2024, to issue notices for the financial year 2017-18. Others have opined that the GST department has not understood the manner in which the IT industry works — transfer pricing provisions work well in direct taxes but attempting to value international transactions using the contours of transfer pricing would be an exercise in futility. There is another school of thought which avers that all that the DGGI wants is information — which it can use later in case there is a possibility of taxing some transactions based on that information.
Reverse charge
Section 9(3) of the CGST empowers transactions that can be subject to a reverse charge — the recipient of the service pays the tax and claims input tax credit. The concept of reverse charge was initially meant for small taxpayers such as good transport operators. Over time, it encompassed a diverse set of transactions such as sitting fees paid to directors and import of services — the report about Infosys was for the import of services.
Transactions between group companies have always troubled the GST authorities. They came up with the cross-charge mechanism for transactions between group companies in India. For cross-border transactions, they are pointing to the import of services.
The Infosys claim has been resolved for 2017-18 (the sum being ₹3,898 crore) with the department closing the incident report for that year. The Central Board of Indirect Tax and Customs would do well to clarify the larger issue of inter-company transactions.
The writer is a chartered accountant