Infosys GST case | Different interpretations of rules could impact IT sector

Infosys, India's second-largest IT services company, is currently under investigation by the Directorate General of GST Intelligence (DGGI) for allegedly evading over ₹32,000 crore ($4.3 billion) in Integrated Goods and Services Tax (IGST) between July 2017 and 2021-2022.

In a late evening statement to the BSE, Infosys said it has paid all its GST dues and is entirely in compliance with the central and state regulations. Infosys stocks closed the day flat at Rs 1,868.05 on the Bombay Stock Exchange.

While Infosys believes it complies with GST regulations, the substantial amount involved and the legal interpretations at stake make this a critical issue.

The resolution of might have broader implications for the IT sector and GST compliance in India.

Failure to pay GST

According to a news report in the Economic Times, the DGGI alleges that Infosys failed to pay IGST on services imported from overseas branches, which are considered distinct entities under the IGST Act.

This investigation revolves around Infosys' alleged practice of creating overseas branches to service clients as part of its agreements.

The DGGI claims that Infosys paid consideration to these branches in the form of overseas branch expenses but did not pay IGST on the services received from them under the reverse charge mechanism.

“Thus, in lieu of receipt of supplies from overseas branch offices, the company has paid consideration to the branch offices in the form of overseas branch expense. Hence M/s Infosys Ltd Bengaluru is liable to pay GST under the reverse charge mechanism on supplies received from branches located outside India,” stated the document accessed by Economic Times.

Show-cause notice

In BSE its statement, Infosys further said that Karnataka State GST authorities had issued a pre-show cause notice for payment of GST of Rs. 32,403 crore for the period July 2017 to March 2022 towards the expenses incurred by overseas branch offices of Infosys.

"The Company has responded to the pre-show cause notice. It pointed out that subsequent to the publication of the news articles, the Company has also received a pre-show cause notice from the Director General of GST Intelligence on the same matter, and the Company is responding to the same. The Company believes that as per regulations, GST is not applicable to these expenses. Additionally, as per a recent Circular (circular number 210/4/2024 dated June 26, 2024) issued by the Central Board of Indirect Taxes and Customs on the recommendations of the GST Council, services provided by the overseas branches to Indian entities are not subject to GST. It is also important to note that the GST payments are eligible for credit or refund against the export of IT services. “Infosys has paid all its GST dues and is entirely in compliance with the central and state regulations on this matter,” the company statement said.

Regulatory interpretation

Infosys has claimed that according to a Central Board of Indirect Taxes and Customs (CBIC) Circular (number 210/4/2024, dated June 26, 2024), services provided by overseas branches to the Indian entity are not subject to GST. This circular, issued on the recommendation of the GST Council, clarifies that such transactions are exempt from GST.

Despite this circular, the GST authorities have issued notices indicating a different interpretation or possibly a dispute regarding the application of these rules to Infosys’ specific case.

Infosys highlighted that GST payments are eligible for credit or refund against the export of IT services. This means that even if GST were applicable, Infosys could offset these payments through credits or refunds, mitigating the financial impact.

Financial liabilities

If the authorities do not accept Infosys’ interpretation, the company could face substantial financial liabilities, including interest and penalties.

The pre-show cause notice issued to Infosys by Karnataka State GST authorities and the DGGI represents a significant challenge for the company.