In an increasingly globalised economy, business activities extend beyond physical borders and traverse geographical boundaries, leading to varied tax implications due to outdated tax legislations that do not fully address these changes. In the service sector, tax obligations can arise even without traveling to different countries. A case in point is the recent incident of the revenue serving Infosys with a INR 32,403 crore (US$ 3.8 Billion) pre-show cause notice, which was later transferred to the Directorate General of GST Intelligence (“DGGI”) for further investigation. Prima facie, the tax assessment seemed not only excessive but also conceptually flawed, as it exceeded the annual profit declared by Infosys. The DGGI later withdrew the said notice. While the dust has settled on this high-stakes incident, the lessons may reverberate across India, particularly for multinational service providers. The questions raised during the investigation will have lasting significance and warrant consideration, extending beyond a single company or tax notice.
The controversy in brief
Infosys allegedly failed to discharge GST under the reverse charge mechanism (“RCM”) on routine expenses incurred by overseas branches, which amounted to importing services into India. The DGGI wanted it to pay GST under RCM, arguing that expenses incurred by foreign branches on salaries, rent, and other operational inputs constituted a “supply of services” to the Indian head office. Hence, Infosys owed GST on the value of these services. Infosys contended that its branches are essential for delivering services to foreign clients as they manage key functions such as on-ground client management, project execution, coordination, and ancillary support, etc.
DGGI’s argument focused on multiple aspects. The transaction qualified as import of services as the place of supply of the cross-border services was India, since the recipient was located here and the provider was located abroad. Establishments of the same legal entity located in India and abroad are treated as ‘distinct persons’ for the purposes of GST legislations and transactions between them qualify as supply. Infosys made substantial payments to its overseas branches for project-related work and thus received services in India. This literal interpretation of the provisions reflects a common pedantry approach of the Indian tax administration looking for loopholes, where form often trumps substance.
The other issue was the revenue authorities’ excessive demand in both size and legal interpretation. Taxing inter-branch allocations as if they were third-party transactions could open the floodgates for numerous disputes, especially in sectors such as IT, consulting, and financial services where overseas operations are core to delivery models and segregation is challenging. However, this resulted in a technical challenge, as these practical global business models do not conform to existing legislative frameworks. The law may label a branch as a separate “person”, but operationally and economically, these units are part of the same enterprise and functioning entirely for head office.
The ripple effect on industry
Levy of GST on amounts paid for expenses would unsettle the IT and consulting sectors, which often deploy “follow the sun” delivery models through overseas branches. If payments made to account for foreign employee salaries, office rent and client-facing functions are all deemed taxable inward supplies, it could distort the global delivery models.
While Infosys could resist the demand due to its resources, smaller firms might lack the technical expertise and funds to defend themselves. Startups or mid-sized service providers facing similar notices could get overwhelmed as such huge tax demands could potentially drive them out of business. They may not be able to afford a prolonged litigation and just settle, even if the legal position is in their favour, to avoid red flags or pending liabilities, especially while seeking investors for funding. Further, the cost of litigation and time involved can itself become punitive.
Broadly, this controversy reopens a long-running conversation about the tax treatment of multinational service arrangements. With Indian firms increasingly operating in multiple jurisdictions, often using shared infrastructure and distributed teams, any move to tax intra-group allocations as services could impact pricing models, competitiveness, and investor confidence. The controversy inadvertently hints at income tax ramifications. If Indian companies understate profits here by attributing services to their overseas branches, it could amount to base erosion.
There is also the spectre of double taxation till the refund is processed. If final invoice to end customer abroad would attract country specific VAT which includes the expenses in taxable value, and as “import of service” into India, businesses could be stuck with a dual levy.
The Circular that changed the game
The turning point in the Infosys case was Circular No. 210/4/2024, dated June 26, 2024 (“Circular”), issued by the Central Board of Indirect Taxes and Customs (“CBIC”). It addresses the GST treatment of cross-border transactions between related entities, particularly when an Indian entity receives services from its overseas branches or affiliates. The Circular relied upon proviso to Rule 28 of the CGST Rules, 2017. The proviso stipulates that where full ITC is available to the recipient, the value declared in the invoice shall be deemed to be open market value. The Circular further clarified that where no invoice is raised, as is often the case in branch accounting for internal cost allocations, the value of the service may be considered Nil and still deemed compliant for GST purposes.
In IT services, exports are zero-rated and domestic supply attracts GST, making the taxpayer eligible for full ITC. In such scenarios, the levy of IGST on intra-entity branch transactions would result in a purely notional tax, with no incremental revenue to the exchequer, as full ITC would be available. Hence, if an invoice is not issued for services provided by the foreign affiliate, the value of such services may be deemed to be Nil with no GST outflow.
The Circular thus prevents arbitrary tax demands and protects businesses from retrospective or stringent interpretations of intra-entity transactions. Consequently, the proceedings against Infosys were unwarranted, lacking both factual and legal basis, and did not warrant taxing deemed import of services from its own branches.
Although this Circular is binding nationwide, taxpayers may encounter inconsistent application across different states due to varying interpretations by state-level authorities, highlighting the fragmented nature of GST enforcement in India. Consequently, MNCs must remain vigilant, ensuring robust documentation and legal strategies to address potential challenges from other state tax authorities.
Need for coherence and consistency
The Infosys episode reflects a broader need for India’s GST system to advance alongside the economy. With India on track to become the third largest economy of the world, after recently overtaking Japan to become the fourth largest, stability and policy ambition are not only important, but imperative! Tax certainty is the bedrock of business confidence. According to a recent news article, revenue is now targeting global capability centres. Revenue is disputing the classification of services provided by GCC to various group entities as export of services, thereby necessitating the companies to remit GST.
Ambiguities in law, retroactive interpretations, or disproportionate enforcement actions send concerning and wrong signals to both domestic and international investors. To sustain its position as a global hub for services such as IT, fintech, and consulting, India must ensure that tax enforcement is predictable, fair, and aligned with business realities. If necessary, the tax administration should be directed to act as business enablers rather than impediments, so that industry is not burdened with erroneous and unjust tax demands.
Conclusion
The withdrawal of the GST demand against Infosys may be a short-term relief, but it’s also a warning. It demonstrates the progress we have made and highlights the ongoing need to align our tax systems with the complex, digital, and globalised landscape in which businesses now operate.
MNCs must ensure precise documentation, including granular records of inter-branch transactions, including the rationale, cost allocation method, and role performed by each entity to justify their stance. By adopting these strategies, MNCs can strengthen their compliance frameworks, reduce the risk of arbitrary tax demands, and operate with greater confidence within India’s evolving GST regime.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
