Infosys Shares Slip Amid GST Investigation- Legitimate Inquiry or Tax Terrorism?

Infosys Shares Slip Amid GST Investigation- Legitimate Inquiry or Tax Terrorism?

Infosys shares dropped nearly 1% in morning trading following significant news. The Directorate General of GST Intelligence (DGGI) is investigating the company for allegedly evading over Rs 32,000 crore in taxes. If proven, this investigation could substantially impact Infosys’ financial standing and market perception.

Details of the Investigation

The DGGI claims that Infosys is “liable to pay IGST under the reverse charge mechanism on supplies received from branches located outside India,” totaling Rs 32,403.46 crores from July 2017 to 2021-22.

Infosys’ Response

Infosys responded in a stock exchange filing, stating that GST does not apply to the expenses claimed by DGGI. The company asserted that it has paid all dues and fully complies with central and state regulations. Infosys clarified that the notice is a pre-show cause notice, meaning no demand has been made yet. The company must explain to GST authorities why the market is invalid.

Financial Impact

The potential tax demand is significant, exceeding the company’s annual net profit and equating to about a quarter of its revenue. In Q1 FY25, Infosys reported a 7.1% increase in net profit to Rs 6,368 crore, with revenue rising 3.6% to Rs 39,315 crore. The company also raised its revenue growth forecast for FY 2024-25 to 3-4%, surpassing market expectations. However, the investigation could potentially disrupt these promising financial figures.

Reactions

Former Infosys board member and Chief Financial Officer Mohandas Pai didn’t hold back in his criticism of the GST demand, calling it “tax terrorism at its worst.” Pai’s strong words urged the Finance Ministry to intervene, arguing that such actions negatively impact investment in India. He noted that Indian software companies, which generate about 95% of their revenue from exports, have been exempt from GST. He accused the GST department of harassing exporters and called on industry body Nasscom to intervene.

Pai warned that the aggressive actions of some GST officials could disrupt business and harm India’s reputation as a favorable business environment. He emphasized that such “tax terrorism” could deter multinational companies and large Indian IT service firms from investing in the country.

Market Performance

Despite the investigation, Infosys’s share price has shown remarkable resilience, rising over 20% since January. This performance outshines the NSE Nifty 50 index, which has gained about 15% in the same period. This positive market response reflects investors’ confidence in Infosys’ ability to weather the storm.