The controversy began when the Karnataka government issued a GST notice to Infosys, alleging that the company owed Integrated GST (IGST) under the reverse charge mechanism for services provided by its foreign branches from FY18 to FY22. The notice demanded ₹32,403 crore in GST claims, causing significant concern within the IT sector. Although Karnataka later withdrew the notice, the incident raised questions about the GST enforcement mechanism and its understanding of the IT industry’s operational model. The revenue department’s interpretation that expenses for overseas branches constituted payments for services was contentious, as it suggested that reimbursements could be seen as payments for services and that foreign branches were distinct from their Indian counterparts.
The substantial GST notice led to an outcry from the industry, with Nasscom criticising it as reflecting a misunderstanding of the IT sector. Nasscom argued that government circulars based on GST Council recommendations should be adhered to, to avoid creating uncertainty and negatively impacting India’s business environment. The association also highlighted that GST enforcement authorities were erroneously issuing notices for payments from Indian head offices to foreign branches without actual service exchanges. Following the withdrawal of the notice, the matter was transferred to the Directorate General of GST Intelligence (DGGI).
Experts expressed concerns that such large notices could set a troubling precedent, particularly for multinational IT companies. They noted that reputational damage and operational impacts could arise from such allegations. Tax professionals also suggested that the GST claim might not hold, citing clarifications from the Central Board of Indirect Taxes and Customs (CBIC) that services from foreign affiliates to domestic entities are considered nil for GST purposes. While the withdrawal marks a significant development, the issue may not be entirely resolved, emphasising the need for a clearer understanding of the IT industry’s operations to prevent further litigation and maintain market stability.
Vakilsearch can assist IT companies and multinational corporations facing complex GST and tax issues. Our team offers specialised services in handling tax disputes, interpreting GST regulations, and mitigating reputational risks. Ensure your business is protected and well-advised—contact Vakilsearch today for comprehensive legal support tailored to your industry needs.
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