A government official earlier told Mint that the Centre was looking at an early resolution of the ongoing tax battle, which began after Karnataka GST officials raised a ₹32,403 crore notice for unpaid taxes for services availed by the firm from its overseas branches between July 2017 and March 2022.
A government official earlier told Mint that the Centre was looking at an early resolution of the ongoing tax battle, which began after Karnataka GST officials raised a ₹32,403 crore notice for unpaid taxes for services availed by the firm from its overseas branches between July 2017 and March 2022.
Bengaluru: Infosys Ltd. said that the Directorate General of GST Intelligence (DGGI) has withdrawn tax demand of ₹3,898 crore for the financial year ended March 2018, in a partial relief for India's second-largest software company.
This decision comes after a government official earlier told Mint that the Centre was looking at an early resolution of the ongoing tax battle, which started after Karnataka GST officials raised a ₹32,403 crore notice for unpaid taxes for services availed by the company from its overseas branches for five years between July 2017 and March 2022.
"The company has now received a communication from DGGI closing the pre-show cause notice proceedings for the financial year 2017-2018. The GST amount as per the pre-show cause notice for this period was ₹3,898 crore," Infosys informed the stock exchanges on Saturday.
Infosys added that it has responded to the pre-show cause notice issued by the DGGI for the period July 2017 to March 2022.
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According to the company's financials, this amount of ₹3,898 crore would have made up 24% of the company's ₹16,029 crore net profit for the year ended March 2018.
DGGI's withdrawal
DGGI's decision to withdraw the tax demand for the first of the five years still leaves the dispute over the remainder ₹28,505 crore unresolved. It is unclear whether DGGI, the GST investigative arm, has issued a notice or intimation to Infosys about the remaining amount it alleged the latter has evaded.
An email sent to Infosys remained unanswered till press time.
Mint could not independently ascertain how the DGGI arrived at ₹32,403 crore in unpaid tax, which is more than a third of Infosys's ₹89,494 crore in total profit over five years till March 2022.
The controversy
The controversy stems from the Karnataka state GST authorities, which is a reference to the zonal body of the DGGI, sending a pre-show cause notice to Infosys on Tuesday, 30 July, for alleged evasion of ₹32,403 crore in integrated GST (IGST) for supply of services by its foreign branches from July 2017 to March 2022.
The Karnataka DGGI office in its letter said the company had set up branch offices abroad and included the expenses incurred by these branches as part of its export invoices from India. The DGGI said that each of these branches are a "distinct person," adding that the company had not paid tax as a recipient of services from the import of services from these branches.
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On Thursday, the software services provider, in its statement to stock exchanges said the Karnataka GST authorities had withdrawn the pre-show cause notice and directed the company to respond to the DGGI's central authority on the matter.
To be sure, the company had received pre-show cause notices from both the central and state offices of the DGGI.
A person with direct knowledge of the matter told Mint that the government was willing to accept Infosys's plea that GST does not apply to the services the company gets from its offshore branches, potentially paving the way for an early closure of the matter.
Nasscom supports Infosys
IT industry body National Association of Software and Service Companies (Nasscom) came out in support of Infosys.
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"Recent media reports of a GST demand of over ₹320 billion reflects a lack of understanding of industry's operating model. This is an industry-wide issue, and multiple companies are facing avoidable litigation, uncertainty, concerns from investors and customers. The issue at hand involves the applicability of GST through the reverse charge mechanism (RCM). The GST enforcement authorities have been issuing notices for remittance by the Indian head office to its foreign branches for cases where there is no service between the head office and the foreign branch for this RCM, ignoring that this is not a case of 'import of service' by the head office from the branch," read Nasscom's statement.
As of the year ended March 2024, the company has 265 locations in 56 countries with over 3,00,000 employees across the organisation.
The CBIC (Central Board of Indirect Taxes and Customs) had stated in a circular dated 26 June that services rendered by the overseas branches of an Indian firm would not attract GST. The circular came after the IT industry representatives brought this matter to the authority's notice.
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CBIC is the highest indirect tax authority of the central government and the DGGI is part of the tax administration ecosystem.