Infosys Coded India’s Tax Network. It Got a $4 Billion Bill

(Bloomberg Opinion) — Software outsourcing from India took off after the Y2K scare of the late 1990s by steering a vast pool of cheap engineering talent toward programming. And because the industry earned dollars, it got to keep most of its profit. New Delhi’s tax bureaucracy couldn’t come up with a plan to slaughter the golden goose. 
It’s never too late, however, to sharpen the knives. Take the notice last week to Infosys Ltd. for allegedly evading India’s goods and services tax, or GST, to the tune of 324 billion rupees ($4 billion) over five years. That’s its annual operating profit. Infosys said Wednesday it has paid all that it is legally required to — and even investors don’t believe that India’s second-largest software exporter needs to provide for the alleged liability. Infosys shares, the best performers on the benchmark Nifty 50 index over the past three months, have fallen 2.5% on the news.
The Bengaluru-based firm sent out another statement Thursday evening, saying that the pre-show-cause notice by the state authority had been withdrawn, and it had been directed to submit a response to the GST intelligence directorate in New Delhi. In a further update Saturday, Infosys said that the notice for the financial year ended in March 2018, covering 12% of the demand, stood “closed.” 
I’m no tax expert, though I have seen the federal authority’s claim. It says that Infosys imported services from its own global offices, through which it solicits business from large corporations. The coding takes place mostly in India, but the foreign branches also make engineers available onsite at clients’ locations to execute outsourcing projects in coordination with Bengaluru. These units, the department claims, are distinct from the head office. And since the Indian company is paying their expenses and billing global customers for the same, it is liable to pay GST on the supply of services received from its branches overseas.(1)
Infosys must be ruing the day nine years ago when it bagged the $200 million project from the government of Prime Minister Narendra Modi to write the software for the GST, India’s biggest fiscal reform in decades. Unifying a plethora of sub-national taxes was a long-standing demand of businesses. They wanted the freedom to seamlessly access a common market of 1.4 billion people. What got implemented, however, was one of the world’s most complicated GSTs with five rates: zero, 5%, 12%, 18% and 28%, even as petroleum products and alcohol continued to be taxed separately. For smaller firms, it was a compliance nightmare.
The poorly structured, hastily implemented GST caused heartburn in the accounting community, with Infosys getting its share of the blame. Persistent glitches were an embarrassment for the company, which made things worse by going on to design a clunky, error-prone web portal for people to file income taxes. The administration was livid about the recurring technical snags. A company that had managed to stay largely above the political fray was suddenly taking blows from all sides. 
Three years ago, Panchjanya, a Hindi weekly believed to be a mouthpiece of the Rashtriya Swayamsevak Sangh, a right-wing cultural organization that stands behind the Modi government, put Infosys co-founder Narayana Murthy on its cover, with a title that translates to “Reputation and a Grievous Harm.” The article took a sinister view of the “messed-up” tax networks. “There are allegations that Infosys management is deliberately trying to destabilize the Indian economy,” it said.
However, Murthy, the billionaire father-in-law of former British Prime Minister Rishi Sunak, is no longer management. He and his family are just shareholders. Still, the 77-year-old remains an influential public figure because of his track record of wealth and job creation. Speaking at a conference last month, he was skeptical of India’s ambitions to compete with China in manufacturing. That’s one of the Modi government’s key growth strategies.
The political backdrop may be the most interesting thing about the drama currently playing out. Demands similar to the Infosys tax notice may be made of other IT services firms, a government source has told Reuters. Any such move will go down badly. The ruling party has lost its parliamentary majority. The first budget of the government’s third term has put off even some of its vocal middle class supporters.
Billionaires, though, remain loyal. Even at the eve of the elections in April, captains of industry were singing Modi’s praises. A sales tax on an industry grappling with lackluster demand and facing a serious challenge from generative artificial intelligence will raise doubts about the Indian leader’s pro-business credentials.   
After all, if there is a loophole in the law through which services that are being exported to global corporate clients become liable for a local Indian consumption tax, then it’s the GST code itself that needs a fix. Unless, of course, someone powerful in New Delhi wants to fix Infosys — or send a chilling message to India Inc.
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(1) Typically, the GST is collected from the supplier. But in certain instances, the buyer becomes responsible for the tax under a so-called ‘reverse charge mechanism.’
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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