Setting up a Global Capability Center (GCC) in India involves navigating a complex tax landscape. Here's a detailed overview of the tax implications you should consider:
Corporate Tax
India imposes corporate tax on the income of companies operating within its borders. The tax rates vary based on the company's status:
- Domestic Companies: The corporate tax rate for domestic companies is 25% for those with a turnover up to INR 400 crores, and 30% for those exceeding this threshold. However, new manufacturing companies can avail of a reduced rate of 15% if they commence production by March 31, 2023.
- Foreign Companies: Foreign companies are subject to a higher tax rate of 40% on their income earned in India.
Transfer Pricing
Transfer pricing regulations ensure that transactions between related parties are conducted at arm's length, preventing profit shifting. GCCs must comply with these regulations, which include:
- Documentation: Maintaining detailed documentation to justify the pricing of transactions with associated enterprises.
- Advance Pricing Agreements (APAs): Entering into APAs with the tax authorities to pre-agree on transfer pricing methodologies.
- Safe Harbor Rules: Utilizing safe harbor rules to simplify compliance for certain transactions.
Special Economic Zones (SEZs) and Software Technology Parks (STPs)
Setting up a GCC in an SEZ or registering as an STP unit can provide significant tax benefits:
- SEZs: GCCs in SEZs can avail of a 100% tax holiday on export profits for the first five years, followed by 50% for the next five years, and 50% of the plowed-back export profits for the next five years. Additionally, SEZs offer exemptions from customs duties, central sales tax, and service tax.
- STPs: STP units can claim indirect tax benefits at the time of imports, particularly beneficial for GCCs requiring hi-tech equipment. STPs also provide a 100% tax holiday on export profits for the first five years, followed by 50% for the next five years.
Goods and Services Tax (GST)
The GST regime in India requires businesses to register and file returns if their turnover exceeds a certain threshold:
- GST Registration: Mandatory for businesses with an annual turnover above INR 20 lakhs (INR 10 lakhs for special category states).
- Input Tax Credit (ITC): GCCs can claim ITC on inputs used in the course of business, but restrictions apply to civil works and employee-related expenses.
- Export Incentives: GCCs can benefit from export incentives, but GST laws do not allow ITC on civil works and services related to the construction of immovable property.
Permanent Establishment (PE) Risks
Changes in the operational model, such as remote working or reporting matrix, can lead to potential PE risks for the GCC's overseas group companies in India. This could result in:
- Taxation of Profits: If a PE is established, the profits attributable to the PE would be subject to Indian taxation.
- Withholding Tax: Payments made to the overseas group companies could be subject to withholding tax at a higher rate.
Foreign Payments
The Finance Act, 2023, increased the withholding tax rate on foreign payments from 10% to 20% (excluding surcharge and education cess). This impacts:
- Intra-Group Payments: GCCs need to reassess the withholding tax rate on common intra-group payments like HQ charges, cost allocations, and license fees.
- Tax Return Filing: Overseas recipients of such payments may need to file tax returns in India.
Other Considerations
- Digital Personal Data Protection Act (DPDPA): Compliance with data protection norms is crucial, especially for GCCs handling sensitive data.
- Foreign Exchange Management Act (FEMA): GCCs must comply with FEMA regulations for foreign investment and repatriation of profits.
How Wisemonk Can Help You Navigate the Tax Implications of Setting Up a GCC in India
Wisemonk, as an Indian payroll and employer of record (EOR) expert, can assist you in navigating the tax implications of setting up a GCC in India:
Strategic Tax Planning: We provide strategic guidance to help you understand and optimize your tax position, ensuring you leverage available tax incentives and exemptions.
Compliance and Documentation: Wisemonk ensures compliance with transfer pricing regulations, helping you maintain the necessary documentation and potentially negotiate APAs to mitigate tax risks.
SEZ and STP Setup: We can guide you through the process of setting up in an SEZ or registering as an STP unit, ensuring you avail of the maximum tax benefits available.
GST Compliance: Our experts handle GST registration, filing, and ITC claims, ensuring you comply with the latest GST laws and regulations.
Foreign Payments: We assist in reassessing withholding tax rates on foreign payments, ensuring compliance with the updated Finance Act, 2023, and managing tax return filing requirements for overseas recipients.
PE Risk Management: Wisemonk helps evaluate and mitigate potential PE risks, ensuring your GCC's operational model aligns with Indian tax laws.
By partnering with Wisemonk, you can streamline your tax compliance, optimize your tax position, and focus on leveraging India's talent pool and business-friendly environment to drive innovation and growth through your GCC.
