Infosys, India’s IT bellwether is on the radar of GST intelligence for alleged evasion of goods and service taxes on its foreign services.
Allegations and Investigations
In a significant development, Infosys Ltd., one of India’s leading IT services companies, has come under the scrutiny of the Directorate General of GST Intelligence (DGGI) for alleged evasion of Integrated Goods and Services Tax (IGST) amounting to over $4 billion (Rs 32,403 crore). The investigation, spearheaded by the GST Intelligence’s Bangalore Zonal Unit, revolves around Infosys’s operations through its overseas branches.
According to the GST Intelligence report, Infosys established these branches outside India to facilitate on-site project-related work. Under the IGST Act 2017, these branches are considered distinct entities separate from the parent company in India. The intelligence gathered by the GST Intelligence indicates that Infosys received services from these overseas branches but did not pay IGST on these imports under the Reverse Charge Mechanism (RCM).
The GST Intelligence report explains that the expenses incurred by Infosys’s overseas branches were included in their export invoices from India, and based on these exports, Infosys computed eligible refunds. This practice has led to significant tax implications.
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Legal Framework and Company’s Response
The core of the GST Intelligence case against Infosys rests on Explanation 1 to Section 8 of the IGST Act, 2017, which treats overseas branch offices as establishments in foreign countries, thereby categorizing them as distinct persons. As a result, the transactions between Infosys and its overseas branches are treated as supplies, liable to IGST under the reverse charge mechanism. For the period from July 2017 to March 2022, the DGGI claims Infosys owes over $4 billion (Rs 32,403 crore) in unpaid IGST.
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Infosys has responded to these allegations with a detailed statement, asserting that GST regulations do not apply to the expenses incurred by its overseas branches. The company cites a recent circular from the Central Board of Indirect Taxes and Customs (CBIC) on the GST Council’s recommendations, which clarifies that services provided by overseas branches to Indian entities are not subject to GST.
Furthermore, Infosys maintains that it has paid all GST dues and complied fully with both central and state regulations. The company also notes that GST payments are eligible for credit or refund against the export of IT services.
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Implications and Industry Impact
The investigation into Infosys’s alleged IGST evasion is a significant development, highlighting the complexities and challenges multinational companies face in navigating India’s tax regulations. If the DGGI’s claims are substantiated, Infosys could face substantial financial liabilities, including back taxes, penalties, and interest. This case also underscores the importance of clarity and consistency in tax regulations, particularly for companies with global operations.
The outcome of this investigation will likely have broader implications for the IT industry and other sectors with similar business models. Companies operating in India with significant overseas branches may need to reassess their tax practices and ensure strict compliance with GST regulations to avoid similar scrutiny. Additionally, this case may prompt further clarifications from tax authorities to address ambiguities and ensure uniform application of tax laws.
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As the investigation progresses, the industry will be closely monitoring developments to understand the potential impact on Infosys and the wider business community. The case serves as a reminder of the importance of robust tax governance and the need for companies to stay abreast of regulatory changes and interpretations to mitigate risks and maintain compliance.
