What Infosys' Tax Demand Means For IT Industry With The IGST Clause

Infosys Ltd. may not be liable to pay the Rs 32,000-crore GST demand notice it has received. This is because of a June notice from the Central Board of Indirect Taxes and Customs, which clarified that if a foreign branch doesn't issue an invoice for its services, the value of those services can be considered zero or based on their market value.

Notably, this is not the only time that a company has been issued a similar demand notice. LTIMindtree Ltd. was given a show cause notice for an amount of Rs 726.9 crore for alleged non-payment of Integrated Goods and Services Tax on export turnover towards services provided to clients abroad. However, this notice was stayed by the Karnataka High Court in April.

So, what does this mean for the larger industry?

Several information technology companies have their head offices in India but set up branch offices outside the country. For the purposes of GST, both of these are regarded as separate entities. The head office in India infuses funds into the foreign branch to fund its operating costs (rent, salaries, etc.). In some cases, the head office may also receive services from such branches, though not often.

The entire deeming fiction of treating an overseas branch and the head office as two distinct entities was perhaps introduced to ensure no tax is required to be paid in India on expenses incurred overseas (on supplies made and received by the branches overseas), said a partner at E&Y, who spoke on the condition of anonymity.

Hence, the deeming fiction in itself should not lead to the assumption that the branch is rendering a service and the funding is consideration for such a service, the person said.

The debate of whether to charge GST or not on such transfers of funds or services has been around for quite some time. There is also a lack of clarity in the interpretation of tax law provisions. There have also been clarifications from the department, which support the matter in favour of not levying taxes on expense reimbursements in the absence of any underlying services.

The tax demand for the years 2017–2018 is already time-barred unless the department is able to establish suppression on the part of Infosys, which means that the department cannot go back in time to issue notices for these previous years without specific, purposeful suppression by the company.

Given this is an industry-wide issue that has been in existence since the service tax era, with several tribunal-level rulings, an allegation of suppression may be technically difficult to substantiate, the person quoted above said. Courts typically do not entertain an argument of suppression in matters involving technical interpretation, the person said.

The Directorate General of GST Intelligence has issued a GST demand of Rs 32,403 crore to Infosys for alleged evasion of the Integrated Goods and Service Tax.

The software exporter has established overseas branches outside India, which is considered a distinct entity under the provisions of the IGST Act 2017. The intelligence unit has contended that the company has received services from overseas branches and has not paid IGST under the Reverse Charge Mechanism on the import of services. 

However, the company responded, saying it did not think a GST was applicable to these expenses. It cited the circular by the Central Board of Indirect Taxes and Customs, which clarifies that services provided by the overseas branches to Indian entities are not subject to GST.

Several lawyers and experts have also contended that the demand notice may not stand due to this reason.