Over the past six to seven weeks, leading Indian IT firms, including Tata Consultancy Services (TCS), Infosys, Tech Mahindra, and LTIMindtree, have been hit with a wave of penalty and tax orders from GST departments nationwide. These companies have collectively received at least 21 penalty notices from various GST offices in Punjab, Uttar Pradesh, Delhi, Visakhapatnam, Rajasthan, Bhubaneswar, Chennai, Bengaluru, and Mumbai.
Although the penalties and tax amounts are relatively minor - ranging from a few thousand to several crore rupees - IT firms are contesting most of these notices. Industry and tax experts suggest that this surge in tax notices is partly due to the expansion of IT firms into smaller cities, where tax authorities may scrutinize their operations more closely.
This development comes in the wake of a significant Rs 32,403 crore GST evasion case flagged against India's second-largest IT firm for services provided by its overseas branches.
From July to September, TCS alone received six notices across Chennai, Goa, Visakhapatnam, Uttar Pradesh, and Bengaluru, with the highest demand being Rs 1.17 crore from Visakhapatnam. Infosys received six notices from states like Odisha, Chennai, Punjab, and Bengaluru. Tech Mahindra received seven notices, while LTIMindtree faced two within the same period.
GST Compliance Across States
Unlike income tax, IT firms must register for GST in every state where they operate. This complexity has led to multiple notices across various states, all related to the fiscal year 2019-20, whose GST return deadlines fell on August 31, 2024. Some firms even delayed filings with the Bombay Stock Exchange (BSE) due to the coincidence of the deadline with a weekend.
While the expansion into smaller cities began before the COVID-19 pandemic, the pandemic accelerated the trend, further complicating GST compliance. IT companies now face the prospect of legal battles in these smaller jurisdictions if discrepancies arise in their GST filings.
Tax experts explain that GST authorities have their own deadlines for scrutinizing returns and issuing notices. The surge in notices results from tax authorities' scrutiny of returns for FY 2019-20 ahead of the August 2024 deadline. The notices mostly involve tax demands, interest, and penalties due to discrepancies found in IT firms’ returns.
Impending GST Demands for FY 2020-21
Experts warn that more GST demands are likely for FY 2020-21 as the next deadline, November 30, 2024, approaches. The divergence between state and central tax authorities in interpreting GST provisions is expected to complicate matters further, particularly for IT firms operating in multiple states.
Smaller cities with fewer large firms are more likely to conduct audits on major IT companies. Lower tax demands in the early years of a branch’s operation could lead to larger tax disputes in later years as their revenues grow, highlighting the need for firms to contest demands early on.
Litigation and Future Compliance
Despite the relatively small size of the tax demands, IT firms are expected to adhere to their litigation policies and challenge the notices. Ignoring these early tax disputes could create challenges in defending their tax positions in the future as their businesses expand and tax liabilities increase.
As India's IT industry continues to expand into smaller cities, firms are bracing for more scrutiny and potential legal battles, ensuring they remain compliant with GST regulations in every state where they operate.
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