Mphasis Faces ₹2,286 Crore Tax Demand for AY 2023-24

Mphasis Limited has received a significant tax assessment order and demand notice for ₹2,286.86 crore from the Income Tax Department for Assessment Year 2023-24. The demand includes additions to taxable income related to employee stock option plan (ESOP) expenses, payments to overseas subcontractors without Tax Deducted at Source (TDS), and discrepancies in Goods and Services Tax (GST) turnover.

Key Details of the Filing

Mphasis Limited disclosed on March 25, 2026, that it received an assessment order and demand notice for ₹2,286.86 crore from the Income Tax Department related to Assessment Year 2023-24. This large demand arises from alleged additions to the company's taxable income. Key dispute areas include the tax treatment of Employee Stock Option Plan (ESOP) expenses, payments to overseas subcontractors where TDS was reportedly not deducted, and differences in Goods and Services Tax (GST) turnover.

Why This Demand Matters

A tax demand of this size, even if disputed, can create uncertainty and potentially impact a company's financial statements and liquidity if provisions are needed or if the company ultimately loses the appeal. For Mphasis, a significant part of the dispute involves ESOP expenses, an area previously subject to tax scrutiny for the company.

Previous Tax Scrutiny on ESOPs

Mphasis has faced prior tax demands concerning ESOP expenses. In FY16-17, it received a demand of ₹393.1 crore for ESOP treatment. An earlier demand of ₹131.5 crore was raised in 2013 for similar reasons, indicating a recurring issue in tax interpretations for the company's employee compensation.

Mphasis's Response and Next Steps

The company plans to contest the assessment order through several avenues. It will file a rectification petition to correct potential computation errors in the order. Mphasis is also evaluating further legal remedies, planning to file an appeal against the current assessment order. Management has expressed confidence in achieving a favourable outcome through the appeal process.

Potential Risks

The primary risk is the substantial tax demand of ₹2,286.86 crore, which could lead to significant financial outflow if not successfully contested. Disputes over ESOP expense treatment and TDS compliance on overseas payments represent key financial and operational compliance risks. The legal and appellate process carries inherent uncertainty and can be lengthy.

Industry Context

Mphasis operates in the Indian IT services sector alongside major players like Tata Consultancy Services (TCS), Infosys, and Wipro. While these peers also navigate complex tax regulations, large tax demands like Mphasis's for AY 2023-24 are company-specific events. Historically, the IT sector has faced scrutiny on ESOP taxation, impacting various companies.

What to Watch

Investors will monitor Mphasis's filing of the rectification petition. The progress and outcome of the company's appeal against the assessment order will be crucial. Any management commentary on conference calls regarding the tax dispute's potential financial impact or resolution timeline.