Tax Relief for Infosys: Centre Likely to Approve Infosys’ Plea on ₹32,000 Crore GST Notice

The Indian government is expected to accept Infosys’ request regarding a GST notice. The Bengaluru office of the Directorate General of GST Intelligence (DGGI) had sent a pre-show cause notice to Infosys, India’s second-largest IT services company, saying it had not paid ₹32,403.46 crore in integrated GST (IGST) for services provided by its foreign branches between July 2017 and March 2022.

On Thursday, Infosys informed stock exchanges that the Karnataka State GST authorities had withdrawn the pre-show cause notice and asked Infosys to respond to the central authority on the matter. The company had received notices from both the central and state DGGI offices.

“No tax demand has been raised; only pre-show cause notices were sent,” said a person familiar with the issue. The person’s name was not disclosed. “The plea is likely to be accepted in light of the CBIC circular on import of services by a related person.”

The Central Board of Indirect Taxes and Customs (CBIC) stated in a circular on June 26 that services provided by overseas branches of Indian firms would not attract GST. This clarification came after receiving feedback from the IT industry.

Another official mentioned that the central government is actively discussing the Infosys tax issue for a quick resolution. This comes as India is trying to attract investments by offering policy stability and an investor-friendly environment.

Emails sent to Infosys, CBIC, DGGI, and the finance ministry for comments were unanswered.

Taxing Matters

Tax disputes arise with intra-group services because different units of the same company in different states are treated as separate entities under GST. The dispute began when the Karnataka DGGI office noted that Infosys had set up foreign branches for business and included these expenses in its export invoices. The DGGI said Infosys was being investigated for not paying IGST on imported services.

Infosys argued that GST did not apply to these services. “The company believes that as per regulations, GST is not applicable on these expenses,” Infosys said in a disclosure. The CBIC circular supports Infosys’ stance, stating that services provided by overseas branches are not subject to GST.

Mint could not verify how the tax authorities calculated the ₹32,400 crore unpaid tax amount, which is 36% of Infosys’s total profits over five years till FY22.

Infosys had planned to approach the Bengaluru High Court next week to challenge the tax notice, but decided to wait for a response from the central authorities after the state authorities withdrew the notice.

The IT industry body Nasscom defended Infosys, saying the GST demand reflected a misunderstanding of the industry’s operating model.

Experts believe the CBIC’s June clarification addresses industry concerns and an early resolution is needed to avoid prolonged litigation and uncertainty for the IT sector, which is crucial for exports and employment.

India’s IT services industry grew 3.8% to $254 billion in revenue in the year ended March 2024, according to Nasscom. This sector contributes about 6.5% to the country’s GDP and employs nearly 5.5 million people.