India is expected to withdraw its demand that Infosys pay $4 billion in back taxes after extensive lobbying by the IT giant and mounting criticism from the software services industry, according to two government sources familiar with the situation. The decision signals a potential shift in the government’s approach to taxing services exports, a move that has raised concerns within the industry.
Last month, Indian authorities ordered Infosys to pay the additional tax, arguing that the company’s overseas offices should have been paying goods and services tax (GST) dating back to 2017. The notice was issued by the country’s tax investigation unit, which followed prevailing regulations in making the demand. However, the federal finance ministry now believes the notice contradicts India’s broader tax principle of not taxing services exports, one of the sources explained.
Government Reconsideration
The sources, who declined to be identified as a formal decision has yet to be made, noted that the finance ministry is reconsidering the tax demand. Infosys and the finance ministry did not respond to requests for comment from Reuters.
The GST Council, which includes state finance ministers and is chaired by the federal finance minister, is expected to formalise the decision during a meeting scheduled for September 9, according to a second source. The move is likely to have wider implications, as similar tax notices worth over $1 billion combined have been issued to 10 foreign airlines operating in India, including Etihad and British Airways. These notices are also expected to be rescinded.
Industry Backlash and Lobbying
The tax demand has faced strong criticism from industry leaders, with former Infosys board member and chief financial officer Mohandas Pai calling the notice “outrageous” and “a case of tax terrorism at its worst.” The National Association of Software and Service Companies (NASSCOM), an industry lobby group, has also called for government intervention, warning that such tax demands could create uncertainty and damage perceptions of India’s ease of doing business. NASSCOM highlighted that the demands reflect “a lack of understanding of the industry’s operating model.”
Infosys’ executive vice president for finance, Sunil Kumar Dhareshwar, met with top bureaucrats last week to argue that the tax demand was unwarranted, according to a third government source. The company has been actively seeking relief from the government, emphasising that the tax notices were not justified under the current regulatory framework.
Broader Implications
This incident is not the first time the Indian government has reversed course after facing criticism. Recently, Prime Minister Narendra Modi’s administration rolled back a new property tax policy and adjusted efforts to recruit private experts to senior government positions after the original advertisements failed to include affirmative action categories for lower castes.
Earlier this month, the government instructed tax officials to seek guidance from the administration before pursuing cases related to widely accepted industry practices. This directive aims to maintain the country’s “ease of doing business” reputation and avoid unnecessary litigation.
The potential retraction of the tax demand on Infosys marks a significant moment in India’s ongoing effort to balance its tax policies with the needs of its growing IT and services sectors. As the GST Council prepares to make its formal decision, the outcome will likely be closely watched by industry leaders and investors alike.