Infosys has publicly acknowledged receiving pre-show cause notices for GST dues exceeding ₹32,000 crore. This announcement, made in a regulatory filing late Wednesday, follows communication from Karnataka State authorities, which retracted the initial pre-show cause notice and directed Infosys to further respond to the central Directorate-General of GST Intelligence (DGGI).
This hefty GST demand reverberated throughout the IT sector, sparking fears of similar demands on other companies. Experts argue that since the operating models of major IT services firms are alike, the reverse charge mechanism (RCM) under GST would apply uniformly across the industry.
Nasscom, the industry body, has called for clarity from the Finance Ministry, emphasizing the issue’s broader implications. The organization stated that the media reports on the ₹32,000 crore GST demand highlight a misunderstanding of the industry’s operating model. This scenario poses industry-wide challenges, including avoidable litigation, uncertainty, and concerns from investors and customers, due to the applicability of GST via RCM.
A CFO from a mid-size IT firm, opting for anonymity due to the sensitive nature of the issue, remarked that this situation should not be viewed as company-specific. He underscored that what Infosys is experiencing is a common industry practice, and similar actions could be taken against other companies, necessitating a collective industry response.
Nasscom further noted that this problem is not new, referencing past court rulings favorable to the industry during the service tax era, as adjudicated by the Customs, Excise and Service Tax Appellate Tribunal.
Amit Maheshwari, a partner at AKM Global, clarified that the DGGI’s notice demands GST payment on expenses of Infosys’ overseas branches, classifying these as imports of services under RCM. He cited a recent CBIC clarification that when a foreign branch provides services to its Indian counterpart eligible for full input tax credit, the invoice value is the open market value or deemed zero if no invoice is issued.
This situation underscores the necessity for clear guidelines and consistent interpretations to ensure compliance and avoid disputes, reflecting broader GST framework challenges for multinational enterprises.
Former Infosys board member and CFO Mohandas Pai condemned the incident as “tax terrorism,” criticizing the tax authorities’ mindset. He lamented the ongoing high fee demands and unresolved tax disputes, noting that despite promises of reform, significant changes remain unfulfilled. Pai highlighted the prolonged harassment and reputational damage companies face due to such tax disputes, calling for substantial reforms in tax dispute resolution.
Omkar Tanksale, a senior research analyst at Axis Securities, pointed out the ambiguity in this case, noting that Infosys’ management maintains it isn’t liable for the GST amount due to their foreign subsidiaries. He suggested that even in the worst-case scenario, Infosys’ business operations or financial health would remain unaffected. Other IT companies are expected to consult their tax advisors to mitigate similar risks and take necessary actions.
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