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IT bellwether Infosys came face to face with a nightmare no company wants to have: a huge demand notice from the taxmen. The Directorate General of Goods and Services Tax Intelligence (DGGI) has asked Infosys to cough up a colossal Rs 32,403.6 crore, which is more than the IT giant’s full year profits. This, the taxmen state, is towards Integrated-GST that is applicable on services received from its overseas branches.

To be sure, this is more of a cashflow problem for Infosys than an outright tax payment. As stated by DGGI, the company must pay IGST for the services it provides through its foreign branches and take input tax credit under the reverse charge mechanism. In simple terms, Infosys needs to pay tax upfront but can claim credit later, citing these as business expenses.

That said, cashflows are the blood of any business and a sudden outflow can avalanche into bigger problems.

Moreover, the nature of the demand itself is being contested. The company has contested the notice, saying that no tax is liable. NASSCOM has put its weight behind Infosys in the matter, stating that the taxmen lack an understanding of the IT business model.

This differing interpretation between tax authorities and Indian companies is not new. GST notices have been sent to scores of companies across sectors time and again. Most times, the services industry has been at the receiving end. This has led to piling up of litigation and delays in resolutions. For companies, it means loss of precious time and productivity and funds being stuck. Tax experts have called out the differing interpretation between GST enforcers and industry, pointing out that such uncertainty sours the investment climate within the country.

There are more questions than answers from the Infosys-DGGI tussle. At the centre of the debate is the question of whether the IT sector should be given a different approach from the tax point of view. As such, services are viewed differently than goods when it comes to taxation. Within services, should the IT industry or indeed exporters or firms with branches overseas get a different treatment?

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While NASSCOM holds that the business model is unique, it remains to be seen whether the taxmen would view it likewise. Irrespective of how the Infosys episode unfolds, uncertainty on taxes is negative for both business and investment sentiment.

The bottomline is that a nation’s tax policy is its frontline message to investors about the stability it offers. Tax policies must be steadfast, well thought out and subject to minimal changes. Also, importantly, tax policy interpretation must not be arbitrary, which in the case of Infosys could appear so.

What’s more, tax notices are detrimental to the reputation of companies involved and therefore should be issued with utmost care and only when there is no doubt that there are dues.

The Karnataka State Authorities, who issued a demand notice, have withdrawn their pre-show cause notice on the GST claim. The DGGI notice still stands. The about-turn by state authorities shows that the notices weren’t fully thought through.

Moreover, the demand notice is for the period 2017-22. The tax authorities should have clarified upfront their stance on the matter instead of waiting all these years.

Such episodes risk infusing a climate of mistrust between industry and the government which is detrimental to the Centre’s efforts of attracting private investment. Moreover, if there is unease in doing business for domestic players, what does it say about foreign entities that wish to set up shop in India?

At a time when the government is aiming to shore up growth through investment, alienating the private sector through tax policy interpretations open to question is ill advised. There should not be a need to protect the ease of doing business from taxmen. Tax policy should facilitate business, not alienate it.

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Aparna Iyer
Moneycontrol Pro