Global capability centres (GCCs) have had a remarkable growth story in India. While they were initially established in India with the objective of supporting their global offices with back-office functions, today they are at the forefront of global innovation, creating cutting-edge solutions in areas such as cloud computing, machine learning, artificial intelligence, blockchain, data science, etc.
As per a report by Nasscom, India currently has over 1,580 GCCs or captives, with over 16 lakh people working in these companies. By 2026-27, Nasscom predicts the number rise to 2,000-plus GCCs in India.
Tax has an impact on most industries and GCCs are no exception. We have listed below top-5 emerging areas that GCCs should tread with caution on:
Changes in functions/operational model
While many GCCs start operations undertaking a limited set of functions, it is seen that they quickly scale up, both in terms of the number of functions as well as going up the value chain. This could have an impact on their transfer pricing arrangements and margins, as well as their taxable indirect tax service profile, which may warrant a re-look.
Further, with changes in the operational model such as in relation to reporting matrix, remote working, etc, there could be potential Permanent Establishment (PE) risks for the GCCs’ overseas group companies in India, that may need to be evaluated.
Potential PE and withholding tax risks in relation to secondment arrangements and related payments have been well documented. Post a recent Supreme Court ruling , in the context of service tax, wherein secondment arrangements have been categorized as “manpower supply” services, aside from the service tax/GST exposure, these risks would need to be re-assessed. Key factors such as the nature of the work being done in India by the expatriates, and relevant documents (such as secondment agreements, assignment letters, etc.) would need consideration.
While tax treaty shelter may be available, this is a fact-specific exercise, which would depend on the terms and conditions of the secondment arrangement and the supporting documentation.
The Finance Act, 2023, has raised the withholding tax rate on foreign payments from 10% to 20% (excluding surcharge and education cess). Accordingly, GCCs would need to re-assess the withholding tax rate on common intra-group payments such as towards HQ charges, cost-allocations, license fees, etc.
They would also need to assess tax return filing requirements in India for the overseas recipients of such payments. There could also be an equalization levy/digital tax interplay, especially in cases where taxes are not being withheld on foreign payments.
The government is bringing out a new legislation, the Development of Enterprises and Service Hubs (DESH) Bill, 2022 to replace the existing SEZ Act, 2005 – many GCCs enjoy SEZ related tax benefits. DESH is expected to govern all aspects of existing and upcoming SEZ development. Unlike in the SEZ ecosystem, the government has proposed to create developmental hubs, where focus is not limited to exports but is also on catering to the domestic market.
It would be important for GCCs to keep abreast of the changes and also explore claiming incentives, if any (currently new SEZ units do not enjoy any income-tax benefits).
BEPS implementation – Pillar Two
The G20, helmed by India, has expressed its commitment to proceed with the implementation of the BEPS Pillars. While Pillar Two may prima facie not be applicable due to the Indian corporate tax rate being higher than the prescribed minimum rate (15 per cent), and also considering the prevailing Minimum Alternate Tax (MAT) in India, there could be onerous compliance and reporting requirements that still need navigation. Overseas payments being made by GCCs, on which taxes are being withheld at a rate lower than the prescribed minimum rate, may also need to be reviewed. Further guidance from the government is awaited.
As can be seen, the tax and regulatory environment in India is dynamic and there are a plethora of new areas that GCCs need to keep abreast of. It would be important for them to keep pace with these tax developments, not just to ensure there are no trip-ups along the way, but also to turbo-charge their growth story.
This article first appeared in News18 on 15 November, 2023.