https://www.financialexpress.com/opinion/tax-misadventures/3573579/
Clipped from: https://www.financialexpress.com/opinion/tax-misadventures/3573579/
Retrospective GST demands on Infosys and others harm the govt’s efforts to build trust with taxpayers.
Senior government functionaries repeatedly vow on tax stability and a “non-intrusive” approach to tax administration,” but wouldn’t always walk the talk.
The Directorate General of Goods and Service Tax Intelligence’s (DGGI) move asking Indian companies with significant business and operational presence abroad to pay integrated GST (I-GST) for the funds they remit to their own foreign branch offices in a business-as-usual way is a clear case of a tax demand far removed from ground realities and logic. While this policy line has been followed by the DGGI and its zonal and state wings for a while, it hogged the headlines only last week with IT major Infosys informing the stock exchanges of receipt of a Rs 32,400-crore I-GST demand. Since the notice pertained to a past period (July 2017 to FY22), it is purported to have retrospective validity. Infosys informed the stock exchanges on Saturday that the DGGI is closing the pre-show cause proceedings for 2017-18. In any case, it is highly unlikely that the tax demand will stand the test of law.
Curiously, similar tax notices have only proliferated, even after the Central Board of Indirect Taxes and Customs clarified via a circular issued on June 26 that so far as the domestic entity hasn’t issued an invoice to the related foreign entity, the value of the “services”, and hence the GST, could be deemed to be nil. The tax authorities are, however, reluctant to drop the attribution of the term “services” to these transactions, which are actually meant to reimburse the costs incurred by the overseas branch offices, which themselves don’t make any profits. They are seeking to find an odd parallel between these routine fund transfers to foreign branches, and Indian entities availing services from unrelated parties abroad. In the latter case, the reverse charge mechanism is duly employed, with full input tax credit for the domestic service recipient, and no complaints are raised.
Senior government functionaries repeatedly vow on tax stability and a “non-intrusive” approach to tax administration,” but wouldn’t always walk the talk. The country, it may be recalled, couldn’t acquit itself well in the high-profile tax disputes with Vodafone and Cairn. New Delhi had to undo the 2012 retrospective tax provision in August 2021, refund Rs 7,900 crore to Cairn in February 2022, and proceed to settle the case with Vodafone amicably. Both the firms had won international arbitral awards in their favour. To be sure, the recent Budget also saw the withdrawal of two contentious taxes — the angel tax that threatened to unsettle the start-up ecosystem, and the “Google tax”, which was opposed by the Big Tech. For several years, the government had been defending these levies. To compound the problem, at their end, tax sleuths continue to go into overdrive, and routinely kick off avoidable rows, the latest involving online gaming.
On the GST front, major strides have already been made. The tax base has expanded considerably, and compliance has risen. Rising number of GST registrations is also bolstering income tax receipts. Revenues from this omnibus indirect tax rose from a below-par 6.2% of GDP in the initial five years, to 6.9% in 2023-24. The imminent restructuring of the tax could include a broadening of the base by minimising exemptions and reducing the slabs from four to three or two. This would help realise the “output effect”, which a broad-based consumption tax is supposed to produce in the economy. In the meantime, the tax authorities would do well to restrain themselves from moves that could create a trust deficit between them and the taxpayers.
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