Our partner Prakriti Jaiswal dives into how GCCs are evolving into true innovation hubs—enabling digital transformation, driving business agility, and unlocking global talent to power enterprise growth.
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What exactly is a GCC, and how does it differ from traditional outsourcing?
A GCC is a business unit established by a multinational company in a foreign country to provide specific services or support functions that are critical to the company’s operations. These functions can range from IT, R&D, finance, human resources, supply chain management, and more. Essentially, GCCs are more integrated into the parent company’s strategy compared to traditional outsourcing. They are designed to build internal capabilities within the company, rather than merely offering external services.
GCCs play a vital role in a company’s global strategy. The key benefits they offer include cost efficiency, access to talent, enhanced innovation, global integration, and improved business agility.
What factors drive companies to set up GCCs in India, and how has it evolved over the years?
Owing to the reasons mentioned above, along with other factors such as favorable government policies and a rapidly growing tech ecosystem, India has become one of the preferred destinations for setting up GCCs. The role of GCCs in India has evolved significantly since their inception. Initially, GCCs in India primarily focused on back-office functions such as IT services, finance, and customer support. Over time, however, they have become more strategic and have expanded to handle a broader range of functions, including R&D, innovation, and global business operations.
Today, GCCs are more closely integrated with the parent company’s global operations. They are seen as vital components of the corporate ecosystem, enabling better coordination and faster decision-making across regions. GCCs now play an essential role in global strategy, offering insights, local expertise, and innovation that enhance the company’s competitive edge worldwide.
As the business landscape has evolved, GCCs in India have adapted to meet emerging demands, growing in significance from being simple service providers to becoming essential hubs for growth, innovation, and global competitiveness.
What is the regulatory landscape for GCCs in India?
When it comes to establishing GCCs, in India, there are several important tax considerations that need to be addressed. The first of these is the choice of legal entity structure. The most common entity structures used are the private limited company and the LLP. The right choice really depends on factors like capital flexibility and the kind of compliances the foreign company is prepared to manage.
Another important consideration is where to set up the operations. Certain areas in India, such as SEZs, STPIs, and IFSCs offer significant tax benefits. These locations can provide income tax relief, duty-free imports, and exemptions from various indirect taxes. These advantages can make a big difference for the bottom line.
There’s a potential pitfall to watch out for i.e. the risk of triggering permanent establishment status for the foreign parent. To minimize this risk, it’s crucial to clearly define the roles and responsibilities of GCC employees. A well-structured operational model that ensures a clear separation of activities between the foreign parent and the Indian GCC is key, as is maintaining solid documentation to support this.
This risk also extends to secondment arrangements—when employees from the foreign parent company are sent to the Indian GCC. If not carefully managed, these secondments can lead to PE issues as well. So, secondment contracts need to be meticulously drafted to ensure they’re in line with Indian tax regulations, preventing any unintended tax liabilities.
Another important aspect being that GCCs are typically compensated on a cost-plus markup basis. This makes it crucial to have a robust inter-company agreement between the parent company and the GCC. It’s equally important to ensure compliance with India’s transfer pricing rules to avoid any potential issues with tax authorities.
With respect to HR aspects – a common benefit that many GCCs offer is the opportunity for employees to participate in ESOPs of the foreign parent company. This requires careful consideration of foreign exchange regulations and tax compliances.
To wrap up, with careful planning and a solid understanding of India’s local tax framework, MNCs can successfully structure their GCC operations, ensuring compliance, minimizing tax liabilities, and avoiding legal complications. When done correctly, setting up a GCC in India can be a great way to tap into the country’s vast market potential while managing both tax and regulatory obligations effectively.
Prakriti specialises in mergers & cross border investments & acquisitions and private equity transactions. Her experience includes rendering advisory and structuring services on a variety of transactions including acquisitions of shares & business, private equity investments, joint ventures and corporate advisory.