Karnataka withdraws show-cause notice, tells Infosys to file response to DGGI

New Delhi: Karnataka authorities have withdrawn the pre-show cause notice served on Infosys, and directed the IT company to submit a fresh response to DGGI central authority on the issue, involving about Rs 32,400 crore GST demand.

The DGGI is the apex intelligence and investigative agency for matters relating to violation of the Goods & Services Tax, Central Excise Duty and Service Tax, and has been entrusted with the task of improving compliance with Indirect Tax laws.

"The company has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice and has directed the company to submit a further response to DGGI central authority on this matter," Infosys said in a BSE filing on Thursday evening.

India's second-largest IT company grabbed headlines on Wednesday after GST authorities slapped a Rs 32,403 crore notice on it for services availed by the company from its overseas branches for five years starting in 2017. The company had earlier described the notice as a 'pre-show cause' notice and, all through, categorically maintained that it believes that GST is not applicable to the expenses mentioned.

Narinder Wadhwa, Managing Director and CEO of SKI Capital said thorough investigations and clear evidence are crucial before proceeding with cases against companies with significant international exposure to maintain market stability and investor confidence.

Wadhwa - who is also co-chair of Capital Market and Commodity Market Committee at PHDCCI - said, "The GST department should be careful when issuing such notices against large, reputable companies, especially those like Infosys whose major business is international".

"Allegations and reputational damage can significantly affect these companies' business operations and market standing. For companies with substantial global business, such reputational losses can lead to a loss of client trust and potentially impact international partnerships and revenue streams."

The Bengaluru-headquartered IT firm on Wednesday disclosed that Karnataka State GST authorities had issued a pre-show cause notice for payment of GST of Rs 32,403 crore for the period July 2017 to March 2022 towards the expenses incurred by overseas branch offices of Infosys Limited, and added that the company has responded to the pre-show cause notice.

"...the Company has also received a pre-show cause notice from Director General of GST Intelligence on the same matter and the Company is in the process of responding to the same," Infosys had said in the statutory filing on Wednesday.

The company believes that as per regulations, GST is not applicable to such expenses. "Additionally, as per a recent Circular...issued by the Central Board of Indirect Taxes and Customs on the recommendations of the GST Council, services provided by the overseas branches to Indian entity are not subject to GST," Infosys had said.

Infosys had argued that GST payments are eligible for credit or refund against export of IT services. "Infosys has paid all its GST dues and is fully in compliance with the central and state regulations on this matter," the company contended.

As per reports, the document sent to Infosys by GST authorities says: "In lieu of receipt of supplies from overseas branch offices, the Company has paid consideration to the branch offices in the form of overseas branch expense. Hence, M/s Infosys Ltd, Bengaluru is liable to pay IGST under reverse charge mechanism on supplies received from branches located outside India to the tune of Rs 32,403.46 crores for the period 2017-18 (July 2017 onwards) to 2021-22".

The demand - at a staggering Rs 32,403 crore - is more than a year's profit for Infosys. For the quarter just ended, Infosys' net profit rose 7.1 per cent year-on-year to Rs 6,368 crore, and revenue from operations stood at Rs 39,315 crore, an increase of 3.6 per cent year-on-year.