Infosys Faces $4 Billion Tax Demand: Indian Authorities May Expand IT Sector Investigation

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Indian tax authorities are likely to expand their investigation into alleged tax evasion across the IT services sector after issuing a staggering $4 billion tax demand to Infosys (INFY.NS). This move has set a precedent, with more notices expected to be served to other major IT firms, according to a reliable government source.

The $4 billion tax demand—equivalent to 320 billion rupees—marks the largest tax demand in Infosys’s history and nearly matches the company’s revenue for the quarter ending June 30. The Indian government accuses Infosys, the nation’s second-largest tech services provider, of significant tax evasion linked to work conducted by its overseas offices.

The National Association of Software and Service Companies (Nasscom), a prominent industry lobby group, has strongly criticized the tax demand. Nasscom argues that it reflects a fundamental misunderstanding of the IT sector’s global operating model and warns of potential negative impacts on investor confidence and the overall business environment in India. The organization stresses the importance of adhering to government circulars to mitigate uncertainty and enhance the country’s business climate.

Although the current focus is on Infosys, the investigation is expected to broaden, with additional tax notices anticipated for other major IT firms. A senior tax official, with insider knowledge, confirmed that the scope of the investigation extends across the entire industry.

In response to the tax demand, Infosys stated that it had received “pre-show cause” notices from the authorities but insisted that it had already paid the appropriate taxes. The company reaffirmed its commitment to complying with both central and state regulations.

The Indian Finance Ministry has yet to comment on the ongoing investigation.

Industry experts believe that the issuance of such a significant show-cause notice could set a precedent, leading to similar actions against other multinational corporations in the IT sector. Rajat Mohan, director at MOORE Singhi, suggests that this could result in a wave of tax notices for alleged violations.

The issue centers around the overseas offices of Indian IT firms, which perform various functions, including executing projects for international clients. The applicability of Indian tax laws to services rendered outside the country remains a contentious point. Some tax experts, such as Abhishek Rastogi, founder of Rastogi Chambers, believe that Infosys may need to seek judicial intervention to challenge these proceedings.

In the past year, India’s goods and services tax department has issued over 1,000 notices to various companies, including Life Insurance Corporation of India, Dr. Reddy’s Laboratories, and Ultratech Cement. Online gaming companies have also been targeted, with tax authorities demanding around 1 trillion rupees for alleged tax evasion.

These developments underscore an increasingly stringent approach by Indian tax authorities, with companies frequently challenging such demands in tribunals and courts.

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