Infosys says GST authorities closing pre-show cause notice worth Rs 4,000 cr on GST evasion

Infosys on August 3 said the Directorate General of Goods and Services Tax Intelligence (DGGI) is closing the pre-show cause notice

Infosys on August 3 said the Directorate General of Goods and Services Tax Intelligence (DGGI) is closing the pre-show cause notice proceedings for the financial year 2017-2018 worth Rs 3,898 crore. On July 31, India’s second-largest IT company received a demand for alleged tax evasion of over Rs 32,000 crore from the DGGI.

“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 Rs. 3,898 Crs,” Infosys said in an exchange filing.

A DGGI report revealed non-payment of Integrated Goods and Services Tax (IGST) on services received from the company's overseas branches between July 2017 and 2021-22. Therefore, an amount worth Rs 28,000 crore pertaining to FY22 still remains under consideration by the authorities.

On August 1, the IT major said that Karnataka state authorities had withdrawn the pre-show cause notice it received a day earlier and directed the company to submit further responses to the Directorate General of Goods and Services Tax Intelligence (DGGI) related to the issue.

Infosys maintains that 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 an exchange filing on July 31.

A day later, the Bengaluru-based company said that Karnataka state authorities had withdrawn the pre-show cause notice it received on July 31 and directed the company to submit further responses to only DGGI related to the issue.

Interestingly, Infosys received the pre-show cause notice from DGGI soon after the media reported that the Karnataka state GST authorities had issued the notice on the same matter, the firm informed the exchanges on July 31.

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

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

Reacting sharply to the development, Infosys’ former 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 was also contested by the firm.

Infosys manages the Goods and Services Tax Network (GSTN) portal. GSTN has built the indirect taxation platform for GST to help taxpayers in India prepare, file returns, make payments of indirect tax liabilities, and make other compliances.

Also read: Tax terrorism at its worst: Former Infosys CFO Mohandas Pai slams Rs 32,000 cr GST demand to IT firm

DGGI alleges that Infosys paid consideration to its overseas branch offices in the form of overseas branch expenses. Consequently, Infosys might have to pay IGST under the Reverse Charge Mechanism (RCM) on these supplies.

Typically, the RCM in GST states that the recipient of goods or services is responsible for paying the tax instead of the supplier. The DGGI contends that Infosys included the expenses incurred towards overseas branches as part of their export invoice from India, and based on these export values, computed the eligible refund.

However, this process resulted in a significant underpayment of IGST by the Bengaluru-based IT firm, according to the DGGI.

Also read: Explained: Why Infosys received a Rs 32,000-cr tax demand, and why it may not need to make provisions