Central Board of Indirect Taxation and Customs has requested that field authorities use its June 26 circular while evaluating issues on related party import of services by local firms, sources told ET.

Infosys and other software businesses that are threatened by large goods and services tax (GST) demands may find some comfort from the move. The cost of services rendered by a foreign affiliate is considered to be zero if a linked domestic firm has not yet received an invoice for such services, according to the circular, according to the ET report.

Therefore, no GST would be applied to such services. The Directorate General of GST Intelligence (DGGI) sent Bengaluru-based Infosys a Rs 32,403 crore pre-show cause notice on July 30 for “non-payment of Integrated GST on import of services” from its foreign branches for the period July 2017, when GST was rolled out, to the FY22, reported ET.

In light of this direction, field officers are now required to re-examine the Infosys case as well as those of other companies in the information technology (IT) and IT-enabled services (ITeS) sector following the company's response, according to ET.

“They (field officials) have been sensitised on the circular issued on valuation of supply of import of services by a related person where recipient is eligible to full input tax credit,” one of the sources told ET.

According to another source who spoke to ET, the recent communication was intended to clarify and emphasize the circular. More than half a dozen IT services companies from Delhi-NCR, Hyderabad, and Bengaluru are facing potential preliminary notices similar to those issued to Infosys.

These notices stem from a disputed interpretation that expenses for services provided by overseas branches are payments for services delivered by the Indian parent company’s offshore offices. The cited source noted that all related cases will be governed by the circular. NASSCOM expressed concerns, stating that the issue reveals a misunderstanding of the industry’s operating model and could lead to widespread litigation and uncertainty for companies across the sector, the report said.

For services rendered outside India, the locally registered entity is generally required to pay GST under the reverse charge mechanism, meaning they must issue a self-invoice and remit the tax themselves. This process is called reverse charge because the tax is paid by the recipient of the service rather than the provider.

Source: Money Control