The ₹32,403 crore tax notice to Infosys has again raised eyebrows about India's tax policies and their effect on multinational companies. The controversy again points to a pattern of tension between technology multinationals and Indian tax departments that stretches back decades, and raises questions about regulatory climate and ease of business in the nation.
Recently, Union Information and Technology Minister Ashwini Vaishnaw has called on major Indian tech companies, including Infosys, to take on the challenge of developing a mobile operating system tailoured for India.
The Directorate General of GST Intelligence (DGCI) sent Infosys a tax notice in mid-2024 on the charges of non-payment of Integrated Goods and Service Tax (IGST) on the services availed from its foreign offices between July 2017 and the year 2021-22. The tax departments maintained that Infosys foreign offices' expenditures are to be categorised as 'Import of Services' and to be charged with IGST through the Reverse Charge Mechanism (RCM). This reading of taxation laws has proven to be contentious in IT sector.
Infosys insists nevertheless that foreign subsidiary offices are no more franchises of the corporate entity and transactions between branches fall outside the definition of taxable services. The rift highlights the frustrations Multi-National Companies incur in operating out of India's intricate taxation regime.
The tax notification set off stern reaction from the IT industry and experts. Nasscom contended that the decision stems from ignorance regarding the model of global delivery used by the industry. Nasscom continued that the tax demand has the potential to harm the country's reputation as an IT leader and breed fear among overseas investors.
Legal experts noted that the courts have in past held in favour of IT companies in cush cases. The policies of exempting export of services from taxation have been a major policy to enhance India's global competitiveness. The forceful tax against Infosys, they say, could set a worrying precedent for other multi-national corporations.
Increasingly sophisticated and developing tax laws: India's tax regulations, especially those relating to digital services and cross border transactions, tend to be subject to various interpretations. With new business modes, tax authorities and businesses tend to have different view on tax obligations.
Transfer pricing and global operations: Multi-national companies operate in many countries, resulting in disagreement on transfer pricing, pricing intra-company transactions. Tax authorities tend to examine these transactions to ensure that businesses are not realigning profits to low-tax countries.
Aggressive tax collection: Indian authorities have been taking aggressive stance towards tax collections, in a part to achieve revenue targets. This has resulted in high-value tax notices, frequently leading to long-drawn litigations.
Digital taxation challenges: The emergence of digital services has given new taxation policies, including India's Equalisation Levy. Although intended to provide equitable taxation of global technology giants doing business in India, such policies tend to generate tensions with foreign companies, especially those from the US.
The Infosys tax row is a reminder of the wider challenges multinational companies have in India. Even with major reforms aimed at enhancing the ease of doing business, regulatory uncertainty, arbitrary tax enforcement, and delayed legal tussles continue to be sources of concern.
Industry leaders contend that uncertain tax requirements may discourage foreign investments and render India less competitive as a business hub.
To address increasing anxiety, policymakers and business leaders have been demanding tax reforms. Mohandas Pai, a former CFO at Infosys, has called on the government to give relief to its honest taxpayers, especially the middle class, and ease tax rules for companies.
India needs to balance strong tax enforcement with a business-friendly environment to continue as a global IT leader. Without more transparent tax policies and consistent enforcement, such confrontations will continue to be a challenge for India's digital economy and foreign investment environment.