Tax authorities on Wednesday flagged indirect tax evasion of ₹32,403 crore at Bengaluru-based Infosys Ltd over services provided by its overseas branches, in one of the largest cases since the debut of the goods and services tax (GST) regime more than seven years ago.

Infosys, India's second-largest technology services provider, said it believes the tax does not apply to the services in question.

A Directorate General of GST Intelligence (DGGI) note said it is investigating the technology bluechip for evasion of integrated goods and services tax (IGST) over a five-year period till FY22. It said the IT giant set up branch offices abroad for carrying out business and included the expenses it incurred towards these overseas branches as part of its export invoice from India.

Distinct persons under IGST Act

As Infosys creates overseas branches to service clients as part of its agreement with the clients, those branches and the company are each treated as 'distinct persons' under the IGST Act, DGGI said, adding Infosys is being investigated for 'non-payment of IGST on import of services as recipient of services.'

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In its incident report, DGGI said services provided by the overseas branches ensured efficient running of the company's businesses in foreign countries; better delivery of the company's services; better co-ordination between the customers; helped sell the company's services to international clients; provided consultancy and legal services required for the business operations of the company in foreign countries; and managed company employees located outside India who are working in onsite projects.

Infosys informed stock exchanges about the tax notice late in the evening.

'GST not applicable'

"The company believes that as per regulations, GST is not applicable on 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 entity are not subject to GST," it said.

Infosys said GST payments are eligible for credit or refund against export of IT services, and that it has responded to the notice. "Infosys has paid all its GST dues and is fully in compliance with the central and state regulations on this matter," it said.

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"The matter appears to pertain to a technical interpretation as per the LODR (Listing Obligations and Disclosure Requirement) filing by the company. Though the Infosys matter pertains to earlier years, one hopes that needless litigation does not emerge, especially given industry-wide ramifications," said Ketan Dalal, managing director, Katalyst Advisors, a structuring and advisory firm.

On social media platform X, Mohandas Pai, a former member on the board of Infosys, termed the tax demand "outrageous" and "a case of tax terrorism".

Earlier in the day, shares of Infosys settled 0.48% lower at ₹1,868.05 on the BSE.