Introduction
In a significant move that could avert a potentially damaging tax litigation, the central government is likely to accept Infosys Ltd.’s plea that Goods and Services Tax (GST) does not apply to the services the company avails from its offshore branch offices. This decision follows a pre-show cause notice issued by the Bengaluru office of the Directorate General of GST Intelligence (DGGI), which flagged non-payment of ₹32,403.46 crore in integrated GST (IGST) by Infosys over a five-year period.
Background
On Thursday, Infosys informed stock exchanges that the Karnataka State GST authorities had withdrawn the pre-show cause notice and directed the company to respond to DGGI's central authority. Both the central and state offices of DGGI had issued pre-show cause notices regarding the same matter. No tax demand has been raised yet, and it is expected that Infosys' plea will be accepted in light of the CBIC circular on import of services by a related person.
CBIC Circular and Its Impact
The Central Board of Indirect Taxes and Customs (CBIC) issued a circular on June 26, clarifying that services rendered by the overseas branches of an Indian firm would not attract GST. This circular followed representations from the IT industry and aims to address concerns about the taxation of intra-group services. The CBIC is the apex indirect tax authority, and the DGGI is a key part of the tax administration ecosystem.
Government's Approach
A second official indicated that the central government is actively discussing the Infosys tax matter for an early resolution. This approach aligns with India’s broader objective of attracting investments, offering policy stability, and ensuring an investor-friendly environment.
Tax Dispute and Intra-Group Services
Tax disputes often arise in the case of intra-group supply of services because, under GST, different offices or units of the same company in different states are treated as distinct entities. The recent dispute with Infosys began when the Karnataka DGGI office flagged expenses incurred by Infosys’ overseas branches, which were included in its export invoices from India. Infosys countered that GST does not apply to these expenses, citing the recent CBIC circular.
Industry Response and Expert Opinions
Infosys planned to challenge the tax notice in court but decided against it after the state authorities withdrew their notice. IT industry body NASSCOM defended Infosys, emphasizing a lack of understanding of the industry’s operating model.
Experts believe that the CBIC’s clarification addresses the industry’s concerns and that an early resolution is necessary to prevent unending litigation. The IT services industry, a critical sector for India’s exports and employment, grew by 3.8% to $254 billion in revenue in the year ended March 2024 and employs nearly 5.5 million people.
Conclusion
The central government's likely acceptance of Infosys' plea on GST exemption for offshore branch services represents a proactive step towards resolving tax disputes and fostering a stable business environment. As the government continues to clarify tax policies, it is expected to enhance investor confidence and support the growth of India’s crucial IT sector.
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