Why High-Stake Tax Refunds Like Infosys Can Become A Problem

In an exchange filing last week, information technology giant Infosys disclosed that it received orders from the Income Tax Department for assessment years 2008 to 2019. The company anticipates a refund of Rs 6,329 crore, inclusive of interest. Such a huge payout could signal a significant financial boost for the company and impact its future financial strategies or investments.

“Their disclosure is very clear that this (payout) is arising out of orders under Section 254 (Income Tax Act), which is an order pursuant to a tribunal order, which means there was a litigation and they won at the tribunal,” Ajay Rotti, founder of Bangalore-based tax strategy and advisory firm Tax Compass, told The Core.

This month itself, Infosys received a tax demand of Rs 341 crore for the assessment year 2020-21 by the Income Tax Department, and the company is assessing the option to challenge the same. This is not the first instance where the company was served tax notices. In 2013, Infosys challenged a Rs 577 crore income tax demand raised by the tax department. 

The refunds to Infosys pertain to taxes paid under contentious circumstances, commonly known as disputed taxes or taxes paid under protest. Unlike cases of inadvertent overpayments, such a substantial refund typically arises from prolonged legal disputes with tax authorities.

Not just Infosys, several companies have faced similar instances of being served tax notices. Given the substantial amount at stake, such notices make it difficult for companies to account for these claims, especially because litigation sometimes continues for years. 

Why These Refunds?

When confronted with a tax demand, particularly a disputed one, Indian tax law requires partial payment — often around 20% of the contested amount — as a prerequisite for contesting the claim. As a result, ongoing legal disputes prompt the tax department to tweak taxes in the following years to account for the unresolved matter, ensuring that the issue remains active until it's sorted out. “It would be the same issue that has been repeated, therefore, they would have paid 20% or so of every year. And once they win the case at a particular forum, one of the courts, then the whole money paid comes back,” Rotti said.

The company said in a press release that it was in the process of assessing how these orders would affect the financial statements for the quarter and year ending on March 31, 2024. Additionally, it's considering filing appeals against these orders. In addition to these developments, Infosys has been subjected to new tax demands amounting to nearly Rs 3,000 crore, which includes subsidiaries.

While Infosys struck luck with the refund, such incidents shed light on the broader landscape of tax assessments and refunds, especially in the case of aggressive assessments. These events prompt a broader question about the significance of such refunds and the underlying dynamics of the tax collection system, especially considering the substantial sums involved.

Tax claims on corporations are not new. Britain’s Cairn Energy won a long-drawn battle against the Indian government on retrospective taxes. In 2022, the government refunded refunded Rs 7,900 crore to Cairn. 

Two-wheeler manufacturer Hero MotoCorp said in an exchange filing on Thursday that it has been served a tax demand notice by the Income Tax Department worth Rs 308.65 crore, accompanied by an interest charge of Rs 296.22 crore, pertaining to six assessment years. Online food delivery platform Zomato was also recently issued a service tax demand along with a penalty order totalling over Rs 184 crore from October 2014 to June 2017. Alcoholic beverages company United Spirits was also served a tax demand notice worth Rs 5.51 crore.

According to Rotti, in the case of such high-stake assessments, most companies typically end up paying a portion of the claim. Usually, refunds come through eventually, but the waiting time can be unpredictable. While there has been some improvement in processing times lately, it still takes months, even up to two years, for refunds to materialise. 

“They've been processing these refunds slightly earlier than in the past, I would say, but it takes months, years for these refunds to come back. And that depends on the issue at what level you are, in terms of your other part on collections, etc,” Rotti said.

Going Forward

With the end of financial year 2023-24, this is also the time when companies evaluate their tax management. In today's business landscape, many companies monitor the amount of their taxes held up in legal disputes. Often, these demands arise from a company's confidence in the strength of its case, leading them not to provision for these liabilities in their financial books. Consequently, when refunds materialise, they don't contribute to the company's income but rather sit on the balance sheet as receivables under taxes receivable. This practice primarily serves as a means of managing working capital.

“Most companies that I work with, keep a very close eye on this, follow up, get cases heard quickly, don't take adjournments, etc. So that some of these can be liquidated. Most corporates including the MNCs (are aware) that there will be some amount that will be paid under protest and litigated, therefore, it comes back. Now only saving grace is really if it comes with interest,” Rotti said.