Budget Expectations 2025: GCC

Global business tax

Ask #1

• Tax breaks for data centres: Several multinational companies are establishing their data centres in India, which play a key role in enabling digital services. These data centres provide data processing and storage capabilities, which have become increasingly important with the rise of mobile internet and cloud computing applications.

• Considering the critical role played by data centres in enabling digital services and also supporting the “Digital India” vision of the government, certain tax breaks for this industry may be considered, for instance, a tax holiday for a certain number of years or a concessional tax rate of 15 percent (akin to the concession provided under Section 115BAB to the entities in the manufacturing sector which are set up after 1 April 2019 and have started manufacturing by 31 March 2024).

• Similar incentives provided to the software sector in the past significantly boosted investments and created large-scale employment opportunities. If provided to the data centre industry, tax concessions will give further impetus to the growth of foreign investments and employment in India and pave a new growth trajectory.

• In addition, the increase in the number of data centres in India would also indirectly support the efforts of the government to host Indian data within data centres located in India.

Ask # 2

• Tax breaks for GCCs in India: Several multinational groups are establishing GCCs in India. The growth of GCCs has been particularly rapid post-2019, with ~75–80 GCCs being set up every year. In addition, GCCs in India generate ~US$65 billion in revenue and employ ~1.9 million people. Further, GCCs are now not merely back offices but drivers of innovation in their business groups.

• Considering this, the government may evaluate providing certain tax breaks for GCCs, such as a tax holiday for a certain number of years or a concessional tax rate of 15 percent (akin to the concession provided under Section 115BAB to the entities in the manufacturing sector that are set up after 1 April 2019 and have started manufacturing by 31 March 2024).

Ask # 3

• Clarity on non-applicability of section 28(iv) with respect to free-of-cost equipment received by Indian software development centres: India has many software development centres of foreign corporations. These software development centres develop a part of the software programme, which is integrated into the corporation’s products, such as televisions, printers, servers and gaming devices.

• These software development centres in India receive hardware/computer supplies from foreign corporations on a free-of-cost/loaned basis to facilitate testing of the software developed in India. Such hardware always belongs to the foreign corporation and is sent to the Indian entity for the limited purposes of testing and is either (i) destroyed, (ii) scrapped or (iii) returned by the Indian entity.

• Tax authorities in India tend to tax the value of such hardware as a benefit or perquisite received during business. In doing so, the tax authorities argue/contend that consideration to the Indian software development centres is being discharged partly through free-of-cost assets, which is not the case. While this argument of the tax authorities has been negated in certain rulings, such as the Sandisk and Samsung rulings of the Bangalore Tribunal, tax authorities continue to widely litigate this issue.

• Accordingly, a clarification may be issued by the government to provide that such hardware received for testing purposes does not constitute a benefit/ perquisite for the Indian software development centre, particularly in cases where the margins of the Indian entity have been tested under the Transfer Pricing (TP) provisions.

Global employer services

Ask #4

• Bengaluru to be considered a metro city for the purpose of 10(13A): Bengaluru is recognised as one of the fastest-growing cities in the world, creating numerous employment opportunities. Given its size, economic significance and the rising cost of living compared with other cities, it is essential to grant Bengaluru the status of a metro city. In light of this, Rule 2A(c) of the Income Tax Rules, 1962, should be amended to include Bengaluru as a metro city, enabling employees to benefit from a 50 percent deduction on House Rent Allowance (HRA).

Ask #5

• Rationalising car perquisite valuation rules for Electric Vehicles (EVs): Income tax rules provide the valuation of motor car benefits, where the employer reimburses running and maintenance expenses. The valuation principles consider the cubic capacity of the engine to determine the perquisite value and typically cover only conventional fuel cars. No separate criteria have been laid out with respect to EVs.

• With the government’s push for EVs and the increasing availability of infrastructure facilities such as fast charging stations in public places such as metro stations, the usage of EVs is rising. Therefore, the government could consider suitably amending Rule 3 to bring in the valuation mechanism for hybrid and EV maintenance (recharging batteries in lieu of fuel) and criteria based on battery capacity (besides the engine capacity). Such a change in the valuation mechanism would bring clarity and promote the use of EVs for a greener future.

Ask #6

Relief from double taxation on employer’s contribution to certain retirals, including interest

• Currently, the employer’s contribution to certain retirals exceeding INR7.5 lakh, along with any interest earned, is taxable in the contribution year.

• PF accumulation withdrawn before completing 5 years of continuous services is taxable. Similarly, superannuation withdrawals in circumstances other than the ones covered by Section 10(13) are considered taxable. However, there is no specific exemption regarding PF/superannuation amount, which has already been considered for taxation due to the aforesaid legislation.

• It is recommended that there should be a specific provision in the Act to provide exemption at the time of withdrawal in respect of contributions/accretions which are already taxed under section 17(2)(vii)/(viia)

Ask #7
Extending relief for deduction under section 80TTA to bank deposits

• Section 80TTA allows individuals to deduct up to INR 10,000 for interest earned on savings bank accounts held with banks, post offices and cooperative societies engaged in banking activities. It is likely that individuals would also park some of their deposits in term deposits to fetch better returns.

• It is recommended that interest on all types of bank deposits (including term deposits) should be included within the scope of section 80TTA. Further, the limit should be increased from INR10,000 to INR50,000.

Transfer pricing

Ask #8
Increase the threshold for applicability of Safe Harbour Rules (SHRs:

• The current SHRs apply only to companies with eligible international transactions for software development/ITeS/contract R&D related to software development up to INR200 crore. This low threshold leaves out even mid-sized companies from the option to apply for SHRs. Given the competitive nature of the industry, the rate of profit margins is not observed to be usually higher merely because a company is bigger in terms of annual revenues. Therefore, there is a requirement to either abolish or significantly increase the current eligibility threshold for SHRs.

Ask #9
Rationalisation of Safe Harbour Rates.

The current safe harbour margins are to be rationalised to make these more taxpayer-friendly and in alignment with current industry trends. Under the following two service categories, based on an analysis undertaken, SHRs proposed margins could potentially look like:

• For ITeS and KPO: 12 percent–14 percent;
• For IT services, including contract R&D (i.e., eliminate the distinction between software development and R&D in software development): 14 percent–15 percent

This will also align the markups more closely with the margins of GCCs than those of competitor countries like those in Eastern Europe and Southeast Asia.

Ask #10
Speedy Unilateral APA conclusion

• Renewal applications are treated at par with new applications, and the benefit of priority and previous review of the concluded initial APA is not available to such applications. As a result, it also takes a lot of time to conclude renewal applications. The government should recognise that renewal applications already have the advantage of earlier site visits, verification of the facts and compliance with post-APA conclusions. Accordingly, there is a need to introduce a mechanism for filtration and conclusion of renewal cases that involve simple rollover of the existing APA with no or minimal change in facts and circumstances. Further, the government can consider introducing an objective/quantitative approach, such as indicative financial yardsticks for resolving routine cases, rather than a subjective approach and detailed case-based analysis. This may help with quicker decision-making and faster resolutions. This can be coupled with standard readiness questionnaires for specific industries.

Ask #11
Waiver of interest under Section 234B and 234C of the Act, post signing of the APA.

• Section 234B of the Act imposes interest when advance tax payments fall short by more than 10 percent of the assessed or returned tax. Similarly, Section 234C of the Act mandates interest charges when advance tax instalments are below the specified percentage of taxes due on returned income. However, in APA cases, which take an uncertainly elongated period for conclusion, these interest provisions should be waived since taxpayers cannot reasonably estimate their income to be eventually negotiated and determined for such year(s), nor are they obligated to pay advance tax on such enhanced income.

Ask #12
TP audits to be in abeyance during the APA process.

• Companies are subjected to regular TP audits when APA is under negotiation. These audits are undertaken even for years and are sought to be covered under an APA. In conclusion of APA, taxpayers are required to file modified returns of income for the past years covered under APA. Taxpayers may also be subject to interest on differential tax payments for past years. Thus, all pending litigation for past years covered in the APA are withdrawn post-conclusion of APA, making this year's audit and litigation proceedings futile. The government may allow keeping the audit for the years covered in the APA in abeyance until the conclusion of the APA.

Ask #13
Allowance of treaty benefits to US Single-Member Limited Liability Company (LLC):

• Due to the differences in treaty interpretation, the Indian Competent Authority does not consider a US single-member LLC to be a “person” and a “resident” under Articles 3 and 4, respectively, of the India-US tax treaty. Due to this, a Single-Member LLC, which is a common corporate structure in the US, is not allowed to claim the benefits of the India-US tax treaty in India. Hence, a US single-member LLC is not allowed to apply for a Bilateral APA or MAP in India. This results in hardship and double taxation for US MNEs with such corporate structures. The government may allow such single-member LLCs to apply for a MAP and/or Bilateral APA and alleviate this hardship.

Ask #14
Aligning Country-by-Country (CbC) threshold with OECD guidance

• Section 286 of the Income Tax Act, read with rule 10DB(6) of the Income Tax Rules, provides for a threshold of INR6400 crore for a multinational group to be liable to file the CbC report. However, per the OECD, in BEPS Action 13, an MNE group is liable to file a CbC report if its aggregate consolidated revenue exceeds €750 million. As India TP law prescribes the threshold in INR, Non-resident multi-national enterprises are required to do a currency conversion to evaluate the requirement to file a CbC per Indian law. Due to this conversion and constant currency fluctuations, some MNE groups breach the local threshold of INR6400 crore. In contrast, they remain under the global limit of €750 million, which creates an additional compliance burden in India.
  
  The government should amend the Rules to align with the OECD threshold of €750 million.

Indirect tax

Ask #15
Clarity on allowance of GST credit on expenditure incurred on civil works and construction of immovable property

• Setting up new GCCs or expanding their footprint primarily involves expenditure on civil works and equipment. With the ruling of the Hon’ble Supreme Court in the case of M/s Safari Retreats, many taxpayers are re-assessing the ITC eligibility of past transactions. Necessary clarification on the coverage and time limit waiver is required on the availability of ITC on goods and services procured in relation to construction of immovable property covering past periods.

Ask #16
Improvement in refund mechanisms

• GCCs are eligible to claim a refund of accumulated ITC as they are primarily engaged in the export of services. Various taxpayers face challenges as their refunds get denied by the authorities on various grounds, for example, if they act as intermediaries between the service recipient and the end customers of such service recipient. While the government has issued clarifications on this, instructions should be issued to strictly follow the same and allow the taxpayer to benefit. Faster and more efficient refund processes would help in managing working capital and cash flow. Improvements in GST refund mechanisms, particularly for export-oriented services in which GCCs are involved, help reduce the working capital crunch.

Ask #17
Enabling payment of tax under the reverse charge mechanism using the credit available in the Electronic Credit Ledger

• GCC demands a highly skilled workforce, which may include a secondment workforce. This would attract tax to be paid under the reverse charge mechanism. Although the tax paid under the reverse charge mechanism is available as an Input Tax Credit (ITC), it must be paid in cash, which creates challenges related to working capital. The discharge of tax only in cash for reverse charge transactions should be relaxed for GCCs, and the taxpayer should be allowed to use the input tax credit to make such payments. This would help create a better working capital situation.