The goods and services tax (GST) authorities may send tax notices to more information technology (IT) companies, citing non-payment of taxes on services received by them from their overseas branches, sources privy to the matter said.
This follows Infosys receiving a whopping Rs 32,400-crore notice from the Directorate General of GST Intelligence (DGGI) for such receipts, thanks to the taxman’s interpretation that since the company and the branches are “distinct persons”, the transactions between them are taxable.
A source said that tax authorities are likely to send notices to many companies based in Hyderabad, Pune and Chennai as they “have overseas branches, supplying similar services”.
However, industry feels it has a strong case against such tax notices, and cites favourable court rulings in similar cases.
On July 30, the DGGI issued a “pre show cause” notice to Infosys stating that the company has not paid GST under “reverse-charge mechanism” (RCM) on import of services, received from its overseas branches, for the period between July 2017 and 2021-22.
Industry body Nasscom said this is an “industry-wide issue, and multiple companies are facing avoidable litigation, uncertainty, concerns from investors and customers”. This indicates that a few firms other than Infosys might have received tax notices on similar grounds, but it could not be verified immediately.
According to Nasscom, 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. “This is not a new problem and courts have been ruling in favour of the industry in these cases,” it said.
Infosys said in a stock exchange filing on Wednesday that as per regulations, GST is not applicable on expenses incurred by its overseas branches. “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 (CBIC), services provided by the overseas branches to Indian entity are not subject to GST,” it added. The company claimed that “GST payments are eligible for credit or refund against export of IT services, and added “Infosys has paid all its GST dues and is fully in compliance with the central and state regulations on this matter.”
The GST evasion notice, however, did not have any major impact on the performance of Infosys shares. The Infosys stock on Thursday closed at Rs 1,852.30 on BSE, down 0.84% from its previous close, while on NSE it ended 1% lower at Rs 1,847.65.
Nasscom highlighted that the above-mentioned CBIC circular which stated that for the import of services, “the deemed open market value of such transactions will be nil if full input tax credit (ITC) is available”.
As per the circular, said the industry body, when full ITC is available to the recipient in India, the value declared in the invoice is deemed to be the open market value, and if no invoice is issued, the value of such services may be considered nil, thus resulting in no GST liability.
The circular specifically issues clarification on the import of services by a ‘related person,’ including foreign affiliates, where full ITC is available to the Indian entity.
However, the circular does not explicitly mention ‘distinct persons’ when discussing the import of services, which has been highlighted in the DGGI notice sent to Infosys. This may be a key argument of GST department if the notices lead to litigation, say tax experts.
“This omission could raise questions regarding the applicability of the same relief provided to ‘related persons’ under the circular to ‘distinct persons,’ particularly in cases involving overseas branches of the same entity,” explained Ankur Gupta, practice leader – Indirect Tax at SW India.
It could be argued that ‘distinct persons’ should be treated similarly to ‘related persons’ for the purpose of this circular, given that both scenarios involve transactions within the same corporate entity, he said.
Abhishek A Rastogi, founder of Rastogi Chambers, said that merely because two establishments are considered ‘distinct persons’ by way of a “deeming fiction”, it cannot be said that the activities between a foreign branch and an Indian entity would be taxable as import of services. “It will still have to be established that there is a supply between such establishments and that it is not a case of service to self” Rastogi added.
Amit Maheshwari, tax partner, AKM Global said this case highlights the need for “clear guidelines” and “consistent interpretations” to ensure compliance and prevent such disputes, reflecting broader challenges within the GST framework for multinational enterprises.