Why are GCCs in India, touted as the next big thing, in a tax tangle?

The key problem, say tax experts, lies in the classification of GCCS and what they do: while tax authorities look at the share of operational work done in India

India has become a preferred location for many foreign companies to set up their back offices or tech hubs, known as Global Capability Centres (GCCs). These centres handle IT services, finance, customer support, software development, and more — mostly for the parent companies based in the US, Europe, or other regions.

 

At a recent event organised by the Confederation of Indian Industry (CII), Finance Minister Nirmala Sitharaman said, “There are about 1,800 GCCs in India, employing nearly 2.16 million professionals. The CAGR at which it has grown is 11 per cent over the last five years. And this number of 2.16 million is expected to go to 2.80 million by 2030."

 

But as these GCCs have grown not just in size but also in what they do, the Indian tax department is taking a harder look at them, say experts. The big question: Are these companies paying their fair share of taxes in India? As a result, many foreign companies are now locked in tax disputes with Indian authorities.

Bone of contention

According to experts, most foreign companies pay their Indian units using a method called cost-plus. This means they pay back whatever the Indian unit spends (on salaries, rent, etc.) and add a small profit margin — say 10 or 15 per cent.

 

"Indian tax authorities argue that since a large share of the operational work — whether it’s IT support, backend processing, or analytics — is done in India by Indian employees, the country should receive a bigger share of the global profits. This is why they challenge the traditional cost-plus model, which gives only a modest 10–15 per cent mark-up to Indian entities," says Sandeep Bhalla, partner with Dhruva Advisors.

 

However, companies argue that strategic decisions, client acquisition, intellectual property, and risk-taking are all still handled at the headquarters in foreign countries. "So the real value creation, they say, is happening outside India, and Indian units should not be taxed like they own or control the entire business," Bhalla added.

 

The problem, says Harshit Khurana, associate partner at Lakshmikumaran & Sridharan, lies in how these Indian units are defined. “If you treat them like routine service providers, they get a small margin. But if they’re actually creating value or intellectual property, that’s a different story — and it invites a much larger tax bill.”

 

This argument is also tied to a complex legal concept called Permanent Establishment (PE) which refers to a fixed place of business through which a foreign company carries out its operations in another country, making its income taxable there. The PE label can be triggered by any one of the following: a fixed physical place (like an office), employees working regularly, or even a dependent agent habitually concluding contracts on the company’s behalf.

 

"If Indian teams are found to be controlling key decisions or acting like the parent company itself, it may be considered a PE — leading to a much wider tax net. However, proving PE isn’t easy. Courts have ruled that having a large team in India isn’t enough; real control and risk-taking must also happen here for PE to apply," stated Bhalla.

 

Several well-known companies having GCCs in India are facing transfer pricing challenges or audits. While some names are under confidentiality, tax experts point to active cases involving Deloitte, IBM and Salesforce among others.

 

Emails written to these companies remained unanswered till the time of publishing.

 

One of the major disputes which has cropped up is regarding ownership of intellectual property (IP). For instance, in the e-commerce industry, companies claim that software IP is legally owned by their overseas entity. But considering certain decision makers are in India, the tax office argues that India deserves a bigger share of the profits," explains Khurana.

 

“Characterisation of the company and the services provided by the company has led to major disputes. Back office functions being carried out by companies have been compared with business analytics giants. This mismatch is creating a lot of litigation," Khurana added.

 

In some cases, as per Khurana, Indian subsidiaries are also being considered as dependent agents for their foreign parent companies—especially when they’re negotiating deals or directly interfacing with clients. That raises another PE red flag.

Policy shift

To help reduce disputes, the government in March expanded its Safe Harbour Rules, increasing the limit of eligible international transactions from ₹200 crore to ₹300 crore. The idea is to allow more mid-sized companies to avoid litigation by accepting pre-fixed margins. However, many larger GCCs still remain outside this limit.

 

“(Prescribed profit) margins under Safe Harbour are quite high — 17 per cent or more. Most companies work on 10-15 per cent. So they either don’t qualify or don’t find it viable,” says Ved Jain, tax expert and former president of the Institute of Chartered Accountants of India (ICAI).

 

According to a senior finance ministry official, the Safe Harbour Rules are primarily designed for GCCs engaged in relatively simple and low-risk business functions. “The real challenge lies with large multinational companies whose GCCs in India now perform complex and high-value functions. This is an emerging area of concern that needs policy attention," he said.

 

“While the Advance Pricing Agreement (APA) route offers a stable and long-term solution, many companies hesitate to opt for it because it is time-consuming, costly, and involves detailed disclosures. As a result, businesses often look for quicker fixes to avoid prolonged litigation,” the official further added.

 

There is a growing need to bring clarity to the taxation framework for GCCs, especially as their roles continue to evolve. “While transfer pricing disputes are certainly more common, the root of the issue lies in how these centres are categorised. The existing rules must reflect this shift in their functional profile," the official added.

 

An email sent to the Finance Ministry remained unanswered till the time of going to the press.

Coping mechanism

When tax disputes arise, companies usually have two options. The first is litigation, which involves challenging the case before tax tribunals or courts. The second is via agreements, which use special mechanisms such as APA (Advance Pricing Agreement) or MAP (Mutual Agreement Procedure) to settle disputes pre-emptively or bilaterally.

 

Experts cite two major reasons for companies to avoid the APA route. First, these are based on current business models. But many firms, especially in the GCC space, say their operations evolve rapidly. So, if they apply for an APA today based on a certain functional profile, it may become irrelevant in a couple of years. As a result, they feel the APA won’t offer long-term certainty.

 

Second, even while APA proceedings are ongoing — which can take two to three years — tax assessments continue in parallel. "This means the company has to bear the cost and effort of the APA process, and still defend its case before the Transfer Pricing Officer during assessments. That dual burden makes the APA route unattractive for many, who then prefer to directly face assessments rather than get locked into a lengthy APA process," explains Khurana.

 

MAP is used when two countries disagree, e.g. India and the US, over a tax position. Competent authorities negotiate so the company doesn’t face double taxation.

 

Bhalla says “MAP is very useful in India–US cases. It saves time and avoids endless appeals. But MAP isn’t universal — it cannot resolve issues like PE or deemed transactions, and once a tribunal verdict is passed, the MAP window closes."

 

Jain suggested that the government could consider a presumptive taxation mechanism to address the rising number of disputes involving GCCs. “A presumptive tax regime can help streamline compliance and provide certainty for companies operating GCCs in India, many of whom face prolonged litigation despite undertaking captive operations,” he said.

 

According to Bhalla, the Dispute Resolution Panel (DRP) mechanism needs to be strengthened with clear and consistent guidelines to address the complex and evolving functions of GCCs. “The safe harbour framework needs a strategic overhaul — especially in expanding turnover and margin thresholds—so that larger and more diverse GCCs can benefit from its certainty,” he said.