The recent allegations by the Directorate General of GST Intelligence (DGGI) against Infosys have sent ripples through the corporate world, raising significant concerns about GST compliance for companies with foreign branches. The accusations, amounting to an evasion of ₹32,000 crore in GST on imported services from overseas branches, underscore a critical issue for multinational corporations.
Analyzing the DGGI’s Accusations
The DGGI has asserted that Infosys failed to pay GST under the reverse charge mechanism (RCM) for expenses incurred by its overseas branches from FY18 to FY22. According to the DGGI, these expenses, included in Infosys’s export invoices from India, should be classified as ‘import of service.’ This classification is based on the criteria that the supplier is located outside India, the recipient is in India, and the place of supply is in India. Under RCM, the recipient is responsible for remitting GST to the government on behalf of the service provider.
Infosys’s Position and Legal Precedents
Infosys has contended that GST regulations exempt these expenses. The company cites a recent Central Board of Indirect Taxes and Customs (CBIC) Circular (No. 210/4/2024, dated June 26, 2024) which clarifies that services provided by overseas branches to an Indian entity are not subject to GST. Infosys maintains that it has complied with all central and state regulations, pointing out that GST payments are eligible for credit or refund against the export of IT services.
Current Status of the Investigation
Infosys announced that the central authority has retracted the demand for the year 2017-18, while the investigation for subsequent years continues. This follows the withdrawal of a pre-show cause notice by state GST authorities. Notably, under GST law, state and central authorities cannot issue notices for the same issue, necessitating the state’s withdrawal to allow the central investigation to proceed.
Origins of the GST Demand
The demand pertains to GST liabilities from July 2017 to March 2022. Tax experts suggest that the timing of the department’s notice, issued on July 31, may be linked to the imminent time-bar for 2017-2018 claims, which occurs on August 5 in cases involving suppression of facts by entities.
Legal Landscape of IGST on Expenses to Foreign Branches
When a company engages with foreign branch offices for activities like R&D or procurement, tax liability depends on the services’ nature. If the foreign branch acts as an intermediary, facilitating goods or services outside India, no tax is levied. However, if the services’ place of supply is in India, it constitutes an import of services, attracting IGST. The June Circular 210/4/2024 aimed to resolve such ambiguities by stating that if no invoice is raised, or if input tax credit is available, the transaction value is considered NIL or as per the Indian entity’s invoice.
Potential Implications for Other Companies
This case could have broader implications, potentially triggering similar GST demands on other companies with international operations. Tax practitioners warn that this situation is a wake-up call for industries with foreign branches to review their transactions and ensure compliance to avoid substantial tax liabilities and interest. Legal experts anticipate that the current pre-show cause stage could lead to more extensive investigations and demands, emphasizing the need for stringent adherence to GST regulations.
Conclusion
The unfolding GST controversy involving Infosys highlights the complexities of tax compliance for multinational companies. As the investigation progresses, it underscores the necessity for corporations to meticulously review and align their international transactions with GST laws to avert significant financial and legal repercussions. This case serves as a crucial reminder of the intricate interplay between domestic tax regulations and global business operations.
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