Tax row: Nasscom seeks clarity from FinMin after GST demand notice to Infosys, other IT companies

Industry body Nasscom on August 1 said it has sought clarity from the finance ministry, a day after Infosys received pre-show cause notice on evasion of Goods and Services (GST) demand and other information technology companies.

"Nasscom had requested the Ministry of Finance to issue a circular to clarify the position so that the industry can avoid this litigation risk," the industry body said in a statement. Nasscom further said that this is not a new problem and courts have been ruling in favour of the industry in such cases.

On July 31, India’s second-largest IT company Infosys received demand for alleged tax evasion of over Rs 32,000 crore from the Directorate General of GST Intelligence (DGGI), according to a document viewed by Moneycontrol.

The tax demand made by the Bengaluru GST office generated shockwaves, considering Infosys' track record for being one of India's best-governed firms.

Infosys, in an exchange filing, said it has paid all dues and GST is not applicable on expenses claimed by DGGI. "Infosys has paid all its GST dues and is fully in compliance with the central and state regulations on this matter," the company said in the filing.

The industry body further said that the government and the GST Council have been supportive on the issue. About two months ago, a circular was issued to address this issue, which stated that the deemed open market value of such transactions would be NIL if full input tax credit is available, Nasscom said.

This issue was even addressed during the erstwhile service tax law, where favourable judgments were delivered by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT). "The Karnataka High Court has stayed a show cause notice in a similar case for a large IT company," Nasscom added.

Nasscom said the demand made from Infosys reflects a lack of understanding of the industry’s operating model. "This is an industry-wide issue, and multiple companies are facing avoidable litigation, uncertainty, (and) concerns from investors and customers."

The issue at hand involves the applicability of GST through the reverse charge mechanism (RCM), and 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 RCM.

Nasscom added that authorities have been ignoring that this is not a case of ‘import of service’ by the head office from the branch.

"We will continue to pursue with the Government on the need for proper implementation of the government circular by the enforcement authorities," the body said.

Nasscom said the government circulars issued based on recommendations of the GST Council must be honoured so that notices do not create uncertainty and negatively impact perceptions on India’s ease of doing business. "It is crucial that compliance obligations are not subject to multiple interpretations," the industry body said.

Reacting sharply to the development, former Infosys’ Chief Financial Officer Mohandas Pai labelled it as 'tax terrorism' at its worst. "The Finance Ministry should immediately intervene. Such tax terrorism impacts investment into India in a big way," Pai, who is also the Chairman of Aarin Capital, told Moneycontrol.

Pai's comments reflect the broader concerns within the business community about the potential implications of such high-profile tax demands on investor confidence and business operations in India, and for a company that is widely known for its robust compliance framework and strong governance standards.

In September 2023, Infosys received a demand for GST totaling Rs 37.75 lakh, which it also contested.