Infosys denies $4Bn tax liability to India
BENGALURU, INDIA — IT services giant Infosys is currently embroiled in a significant tax dispute with the Indian state of Karnataka, potentially impacting the global outsourcing industry.
Tax demand and Infosys’s defense
In its latest Bombay Stock Exchange filing, the firm disclosed that the state issued a tax demand of nearly $4 billion, alleging that expenses incurred by Infosys’s overseas branches should be subject to Indian sales tax.
However, Infosys firmly denied the allegations, arguing that these expenses should not attract Indian sales tax.
The company cited a government circular that clarified the valuation of imported services, asserting that it is “fully in compliance with the central and state regulations on this matter.”
While not introducing a new policy, the circular clarifies the treatment of imported services under India’s Goods and Services Tax (GST) regime, which was implemented in 2017.
Industry reactions
The case has garnered significant attention, with industry commentators highlighting the irony that Infosys, the company responsible for managing India’s income tax portal, is now under investigation for tax evasion.
This portal, launched in 2021, faced widespread criticism for frequent glitches and slow processing times, leading to a temporary reversion to manual tax filings.
Potential ramifications
If the tax demand is upheld, it could have far-reaching implications for the IT services industry in India. Infosys could face a fine equivalent to nearly one year’s profit and a quarter of its revenue.
This could also set a precedent affecting how expenses incurred by overseas branches are treated under Indian tax law, potentially leading to higher compliance costs and revised tax strategies for multinational companies.
A spokesperson from a rival IT sourcing company, wishing to remain anonymous, stated, “Multinational companies may have to revise their tax strategies, potentially leading to higher tax liabilities. This could impact their profitability and financial planning, particularly for firms with significant overseas operations.”
Call for clearer guidelines
The National Association of Software and Service Companies (Nasscom), India’s premier IT body, has called for clearer guidelines and streamlined processes in India’s tax administration.
“It is crucial that compliance obligations are not subject to multiple interpretations,” Nasscom stated. The organization previously requested the Ministry of Finance to issue a circular to clarify the position, aiming to avoid litigation risks for the industry.
The $4 billion tax dispute facing Infosys highlights significant issues in the interpretation and application of India’s GST regulations for multinational companies. The outcome of this case will be closely watched by industry stakeholders and could prompt calls for more comprehensive and transparent tax guidelines in India.
