A day after Infosys acknowledged the receipt of a notice for alleged evasion of over Rs 32,000 crore ($3.8 billion) in integrated goods and services tax (IGST), the IT major said it has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice.

In a late exchange filing on Thursday, the Bengaluru-based IT firm said, “The Company has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice and has directed the Company to submit further response to DGGI central authority on this matter.”

The development comes after a hue and cry raised by industry leaders and association post the media reports of a GST demand on Infosys. Earlier in the day, industry body, nasscom said that the recent episode reflects GST enforcement mechanism’s lack of understanding of IT industry operating model. It added that it is not a case of ‘import of service’ by the head office from the branch, as made out to be.

The body added that this is an industry wide issue, and multiple companies are facing avoidable litigation, uncertainty, concerns from investors and customers. nasscom had requested the Ministry of Finance to issue a circular to clarify the position so that the industry can avoid this litigation risk.

Two IT veterans spoke to ET on the condition of anonymity on the topic of Infosys receiving IGST evasion. A CFO of an Indian IT firm, said, IT firms deal in foreign lands either through branches or subsidiaries. “Infosys has a lot of foreign branches relative to other IT firms. Others have more subsidiaries which are independent profitable entities. Branch renders services to parents. The services range from marketing, collecting receivables, servicing clients, or paying salary and managing social security of employees transferred to branches from parents in India. The GST authorities interpreted these services as import of services from branches to parents.”

Another former CFO of an Indian IT firm, said, this notice is not even a show cause notice, but a pre-show cause notice to just collect information. “The issue with Infosys case is related to functions of branch which is more to do with marketing and some onsite services to fulfil the export obligations of the parent company.”

He further explained that the tax department is saying that there is a service rendered by the overseas branches to the Indian parent, and there needs to a IGST paid on the same. “But in June this year, the GST council has clarified saying that overseas branch is an integral part of the Indian parent (company) and since this is for export there is no liability of IGST on this transaction. This was a clarification and not an amendment, so it applies retrospectively from day one.”“So even if we assume that the tax department is right and Infosys has to pay IGST on those transactions, since it is a export, there will be offset (the Indian government will have to refund the same).

CA Parag Mehta, Partner Indirect Tax, N.A. Shah Associates LLP, said, “The notice for Rs 32,000 crores on Infosys is blatantly wrong in law The issue stands settled by circular number 210/4/2024 dated June 26, 2024 wherein it has been clarified that if no invoice is issued for the services provided by the foreign affiliate, the value of such services may be deemed as nil and considered the open market value. Hence even if there is demand for any reason the company is eligible to take benefit of the said circular and defend the same.”

A day after Infosys acknowledged the receipt of a notice for alleged evasion of over Rs 32,000 crore ($3.8 billion) in integrated goods and services tax (IGST), the IT major said it has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice.

In a late exchange filing on Thursday, the Bengaluru-based IT firm said, “The Company has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice and has directed the Company to submit further response to DGGI central authority on this matter.”

The development comes after a hue and cry raised by industry leaders and association post the media reports of a GST demand on Infosys. Earlier in the day, industry body, nasscom said that the recent episode reflects GST enforcement mechanism’s lack of understanding of IT industry operating model. It added that it is not a case of ‘import of service’ by the head office from the branch, as made out to be.

The body added that this is an industry wide issue, and multiple companies are facing avoidable litigation, uncertainty, concerns from investors and customers. nasscom had requested the Ministry of Finance to issue a circular to clarify the position so that the industry can avoid this litigation risk.

Two IT veterans spoke to ET on the condition of anonymity on the topic of Infosys receiving IGST evasion. A CFO of an Indian IT firm, said, IT firms deal in foreign lands either through branches or subsidiaries. “Infosys has a lot of foreign branches relative to other IT firms. Others have more subsidiaries which are independent profitable entities. Branch renders services to parents. The services range from marketing, collecting receivables, servicing clients, or paying salary and managing social security of employees transferred to branches from parents in India. The GST authorities interpreted these services as import of services from branches to parents.”

Another former CFO of an Indian IT firm, said, this notice is not even a show cause notice, but a pre-show cause notice to just collect information. “The issue with Infosys case is related to functions of branch which is more to do with marketing and some onsite services to fulfil the export obligations of the parent company.”

He further explained that the tax department is saying that there is a service rendered by the overseas branches to the Indian parent, and there needs to a IGST paid on the same. “But in June this year, the GST council has clarified saying that overseas branch is an integral part of the Indian parent (company) and since this is for export there is no liability of IGST on this transaction. This was a clarification and not an amendment, so it applies retrospectively from day one.”“So even if we assume that the tax department is right and Infosys has to pay IGST on those transactions, since it is a export, there will be offset (the Indian government will have to refund the same).

CA Parag Mehta, Partner Indirect Tax, N.A. Shah Associates LLP, said, “The notice for Rs 32,000 crores on Infosys is blatantly wrong in law The issue stands settled by circular number 210/4/2024 dated June 26, 2024 wherein it has been clarified that if no invoice is issued for the services provided by the foreign affiliate, the value of such services may be deemed as nil and considered the open market value. Hence even if there is demand for any reason the company is eligible to take benefit of the said circular and defend the same.”