This is after the Bengaluru office of the Directorate General of GST Intelligence (DGGI) issued a pre-show cause notice to the country's second-largest IT services firm, flagging that it had not paid ₹32,403.46 crore in integrated GST (IGST) over five years between July 2017 and March 2022 for "supply of services" by its foreign branches.

On Thursday, Infosys informed stock exchanges that the Karnataka State GST authorities, a reference to the zonal office of DGGI, had withdrawn the pre-show cause notice and directed it to respond to DGGI's central authority on the matter. The company had received pre-show cause notice on the same matter from both the central and state offices of DGGI.

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"No tax demand has been raised; only pre-show cause notices were sent," said the person cited above, who spoke on condition of not being named. "The (taxpayer's) plea in light of the CBIC circular on import of services by a related person will likely be accepted."

The CBIC (Central Board of Indirect Taxes and Customs) had on 26 June stated in a circular that services rendered by the overseas branches of an Indian firm would not attract GST. The circular came after the authority received representations from the IT industry in this regard. 

CBIC is the apex indirect tax authority of the central government. The DGGI is part of the tax administration ecosystem. 

A second official, who also spoke on condition of anonymity, said that the central government was actively discussing the Infosys tax matter for an early resolution.

The government's intention to resolve the case early comes at a time when India is signalling to the world that it is serious about attracting investments, offering policy stability and ensuring an investor-friendly environment.

Emails sent on Thursday and Friday to Infosys, CBIC, DGGI and the finance ministry seeking comments remained unanswered till press time.

Taxing matters

Tax disputes 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, subject to conditions. 

The latest dispute started after a note from the Karnataka DGGI office on Tuesday, 30 July sent to Infosys said that the company had 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. 

Each of these overseas branches is treated as "distinct persons" under the IGST Act, DGGI said, adding that the company is being investigated for "non-payment of IGST on import of services as the recipient of services".

Infosys countered that the tax did not apply to the services in question. "The Company believes that as per regulations, GST is not applicable on these expenses," Infosys said in a disclosure made to the exchanges on Wednesday. 

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"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," the statement added.

Mint could not independently ascertain how the tax authorities arrived at the figure of ₹32,400 crore in unpaid tax, which is 36% of Infosys's ₹89,494 crore in total profits over five years till FY22.

Calls made to Sucheta Sreejesh, additional director general of DGGI zonal unit Bengaluru, went unanswered.   

Infosys had planned to approach the Bengaluru High Court as early as next week, challenging the tax notice issued by the authorities in Karnataka, according to a tax consultant advising the Bengaluru-based IT services firm who wished to remain anonymous. 

But after the state authorities withdrew its notice, the company has decided not to approach the court and wait for a response from the central authorities, this consultant added.

On Thursday, IT industry body Nasscom defended Infosys. "Recent media reports of a GST demand of over  ₹320 billion reflected a lack of understanding of the industry's operating model," the apex body said in a media release, without naming Infosys.  

Early resolution needed

Experts said that CBIC's clarification in June addresses the industry's concerns around taxation of such intra-group transactions and that it makes sense to find an early resolution. 

 "The circular (mentioned by the company in its Listing Obligations and Disclosure Requirement filing) clarifies to the effect that where input tax credit is available, the value of head office/branch services shall be deemed to be nil if the recipient is eligible for full input tax credit," said Ketan Dalal, managing director of Katalyst Advisors, a structuring and advisory firm.

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Dalal added that the government ought to put a lid on the issue, as it could otherwise "spiral into unending litigation with needless uncertainty for the IT industry, and more so for a sector that is critical from a larger export and employment perspective".

The country's IT services industry grew 3.8% to end with $254 billion in revenue in the year ended March 2024, according to Nasscom. This translates to about 6.5% of the country's GDP. IT services is the largest organized job creator, employing nearly 5.5 million people.