Infosys vs USD 4 Billion GST: CBIC sensitises officials about June circular as tax experts bat for clarity

The Central Board of Indirect taxes and Customs has asked field officials to take into account its June 26 circular when considering matters about related party import of services by local entities, people familiar with the development said. The move could provide relief to Infosys and other tech companies facing the threat of massive goods and services tax (GST) demands.

As per the circular, if a related domestic entity has not issued an invoice for a service provided by its foreign affiliate, the cost of such services is deemed to be nil. Such services would, therefore, not attract any GST.

On July 30, Bengaluru-headquartered tech firm Infosys received a Rs 32,403 crore pre-show cause notice from the Directorate General of GST Intelligence (DGGI) for “non-payment of Integrated GST on import of services” from its foreign branches for the period July 2017, when GST was rolled out, to the FY22.

Field officers are now expected to re-examine the Infosys case, after the company’s response, and that of others in the information technology (IT) and IT-enabled services (ITeS) industry in light of this directive.

“They (field officials) have been sensitised on the circular issued on valuation of supply of import of services by a related person where recipient is eligible to full input tax credit,” said one of the persons cited above.

It was an informal communication to reiterate and explain the circular, another person said. ET reported on Thursday that over half a dozen IT services companies based out of Delhi-NCR, Hyderabad and Bengaluru were staring at the possibility of preliminary notices similar to the one served on Infosys.

The notices are based on the contentious interpretation that expenses toward overseas branches are payments for services delivered by the offshore offices of the Indian parent. The person cited said that all cases connected to this issue will be guided by the circular. Industry grouping Nasscom had on Thursday raised concern over the matter, saying that it reflected a lack of understanding of the operating model and could snowball into a sector-wide issue with companies facing litigation and uncertainty.

It said GST enforcement authorities have been issuing notices for remittances by the Indian head office to foreign branches in cases where there is no service between the entities under the reverse charge mechanism. This is not a case of ‘import of service’ by the head office from the branch, the industry body said. Typically, for a service provided outside India, GST has to be paid by the locally registered entity under the reverse charge mechanism. In such cases, the locally registered entity is required to issue a self-invoice and pay the tax. This is known as a reverse charge as tax is paid by the entity supplying the service.

“The government has continued to issue clarifications proactively to reduce litigations, specially in revenue-neutral situations. The recent clarification in relation to allowing any valuation of imported services from related persons in case of full availability of credit should be used by field formations to avoid any such interpretative disputes,” said Bipin Sapra, partner, EY.

Another person aware of the DGGI action pointed out that the pre-show cause notice was sent to Infosys by the Karnataka GST authorities on the basis of a previous investigation and the first notice was served on May 10, before the CBIC circular was issued June 26.