Karnataka withdraws Infosys tax notice; here’s how stock reacts

In a partial respite to Bengaluru-based Infosys, Karnataka State GST authorities have withdrawn the pre-show-cause notice against the company for alleged tax evasion. The state tax authority has directed the IT major to submit a response to the Directorate General of Goods and Services Tax Intelligence (DGGI) central authority on the matter.

“The Company has received a communication from Karnataka State authorities, withdrawing the pre-show cause notice and has directed the Company to submit further response to DGGI central authority on this matter,” Infosys said in an exchange filing last night.

Following this news, Infosys shares opened lower at ₹1,843.95, down 0.45% against the previous closing price of ₹1,852.30 on the BSE, in sync with the weak broader market. In the first hour of trade so far, the IT heavyweight declined as much 1.3% to ₹1,828.7, while the market capitalisation slipped to ₹7.59 lakh crore.

Meanwhile, the BSE Sensex was trading nearly 800 points, or 1%, lower at 81,068. Similarly, the BSE IT index was down 1%, with all sectoral leaders such as Tata Consultancy Services (TCS), Infosys, Tech Mahindra, HCL Tech, Wipro falling between 1-2%.  

Infosys shares touched its 52-week high of ₹1,903 on July 29, 2024, surging 41% against its 52-week low of ₹1,348.10 touched on August 3, 2023. The counter has outperformed BSE benchmark Sensex and BSE IT index in terms of returns in the last one year. The IT heavyweight has risen 37% in the past 12 months compared to 22% rally in Sensex and 36% rise in the BSE IT index. The stock has surged 20% in calendar year 2024, compared to a 12% rise in Sensex and 14% in the BSE IT index.

The development came a day after Infosys received pre-show cause notice for payment of Goods and Services Tax (GST) of ₹32,403 crore. The tax notice pertains to a period of 5 years starting from July 2017 to March 2022 towards the expenses incurred by overseas branch offices of Infosys. The company received one such notice from the Karnataka State GST authorities, to which it already responded.

The country’s second largest software exporter, however, refuted the claim and said it has “paid all its GST dues and is fully in compliance with the central and state regulations on this matter”.

“The company believes that as per regulations, GST is not applicable on these expenses.  Additionally, as per a recent Circular (circular number 210/4/2024 dated June 26, 2024) issued by the Central Board of Indirect Taxes and Customs on the recommendations of the GST Council, services provided by the overseas branches to Indian entity are not subject to GST,” it clarified in the regulatory filing. 

“It is also important to note that the GST payments are eligible for credit or refund against export of IT services,” the filing noted.

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