India’s GCCs Face Tax Challenges: Tread with Caution in Emerging Areas
India’s global capability centres (GCCs) have experienced significant growth in recent years. Once focused on back-office functions, these GCCs are now at the forefront of innovation, driving advancements in cloud computing, machine learning, artificial intelligence, blockchain, and data science. With over 1,580 GCCs and more than 16 lakh employees, India is poised to see further expansion in this sector, with predictions of over 2,000 GCCs by 2026-27.
However, as with any industry, tax considerations play a crucial role in the operations of GCCs. Here are five emerging areas that require careful attention:
1. Changes in functions/operational model: As GCCs expand their operations and move up the value chain, their transfer pricing arrangements and margins may be impacted. Additionally, changes in the operational model, such as remote working and reporting matrix modifications, could pose Permanent Establishment (PE) risks for overseas group companies. These risks need to be evaluated and managed effectively.
2. Secondment arrangements: Secondment arrangements and related payments can expose GCCs to potential PE and withholding tax risks. Recent Supreme Court rulings have categorized such arrangements as manpower supply services for service tax purposes. It is essential to re-assess these risks, considering the nature of work done by expatriates in India and the relevant documentation.
3. Foreign payments: The Finance Act, 2023, has raised the withholding tax rate on foreign payments from 10% to 20%. GCCs must review the withholding tax rate on common intra-group payments, such as HQ charges and license fees. They must also assess their tax return filing requirements in India for overseas recipients of these payments. Interplay between equalization levy and digital tax may arise when taxes are not withheld on foreign payments.
4. DESH Regulations: The government is introducing the Development of Enterprises and Service Hubs (DESH) Bill, 2022, to replace the existing SEZ Act, 2005. Many GCCs currently benefit from SEZ-related tax advantages. DESH will govern existing and upcoming SEZ developments, including domestic market-focused hubs. GCCs should stay informed about these changes and explore claiming incentives, possibly shifting away from existing income-tax benefits.
5. BEPS implementation – Pillar Two: The G20, led by India, is committed to implementing the BEPS Pillars. While Pillar Two may not directly apply due to higher Indian corporate tax rates, compliance and reporting requirements remain burdensome. GCCs must review overseas payments subject to lower withholding tax rates than the minimum prescribed rate. Further guidance from the government is anticipated.
GCCs in India must navigate the dynamic tax and regulatory environment to avoid pitfalls and ensure continued growth. Staying updated on tax developments is crucial for their success. By treading with caution and addressing these emerging challenges, GCCs can continue to drive innovation and contribute to India’s thriving business landscape.
