Infosys GST Notice Sparks Concern About How Small Firms Will Deal With Huge Demands

The goods-and-services-tax notice of Rs 32,000 crore against Infosys Ltd. for alleged tax evasion raised concerns about how smaller businesses, especially the micro, small and medium enterprises, will handle similar demands.

The Karnataka State GST authorities have issued a pre-show-cause notice to the IT major on Wednesday for the period from July 2017 to March 2022 towards the expenses incurred by its overseas branch offices.

"Litigation appears to be a necessity in a situation when such huge demands are proposed by the lower adjudicating authorities," according to advocate Abhishek Rastogi.

However, the litigation costs and the time consumed in the relief sought are two factors that need consideration.

The MSMEs will struggle with legal issues over transactions with their branches. They can argue that these issues are open to interpretation and that extending the time period for disputes should not apply, Rastogi said.

Under the GST, there is a huge onus on the taxpayer and even small mistakes by suppliers or misunderstandings of the law can lead to big costs in legal fees, interest and penalties. Large companies can handle these costs, but it is much tougher for small and medium-sized businesses, according to Parag Mehta, partner at NA Shah Associates LLP.

On issue being faced by Infosys, the position of law has already been cleared by a government circular dated June 26. It has clarified that if a foreign affiliate provides services to a related domestic entity, and the domestic entity could claim full input-tax credit, the invoice value can be treated as the market value under rule 28(1) of Central GST Rules.

If no invoice is issued by the domestic entity but they can still claim full input-tax credit, the service value may be considered zero or the market value under the same rule, according to the circular by the GST policy wing of the Central Board of Indirect Taxes and Customs.