Budget 2024 Expectations: Global Capability Centers (GCCs)

Gaurav Gupta, Partner and GCC industry leader, Deloitte India

Current environment

• The India GCC journey continues to grow, with more than 1580 GCCs employing 1.66 million people. The mature technology ecosystem, talent and cost advantage and politically stable environment amid global uncertainty are the main factors that make India a successful GCC global leader and a preferred location.
  
• In the next two years, GCCs could move up to 1900 centres in India, employing 2 million people with a revenue of US$60-80 billion. However, GCCs need support in infrastructure development, increased investment in skill development, consistent taxation policies and an ecosystem that fosters innovation to realise their full potential.
• GCCs continue to invest in hiring and upskilling talent and developing skills across the board, including in niche areas. They also focus on developing leadership roles within and from GCCs as we see a rise in global roles being anchored from GCCs.
• The current direct tax policy landscape in India is constantly evolving, driven by the government's efforts to reform existing systems and processes, with a focus on improving efficiency and transparency.
• Significant measures, such as a reduction in corporate tax rates, introduction of concessional tax regimes and elimination of the minimum alternate tax regime, have been undertaken to attract investment and foster a favourable business-friendly tax climate. The Indian government has also adopted various globally accepted best practices to provide trust and confidence to foreign investors and prevent disputes. Safe harbour rules, an advanced pricing regime, an effective MAP programme and the adoption of the sixth method for transfer pricing analysis are a few examples.
• The pool of digital talent in India with expertise in areas of cloud computing, Artificial Intelligence (AI), big data and the Internet of Things (IoT) grew at a CAGR of more than 35 percent over the past four years. The talent pool is expected to reach 2.6 million by 2024. Due to the higher availability of digital skills and capabilities in India, we see a rise in the number of GCCs, driving digital transformation initiatives for their parent organisations or having a significant involvement in them.
• The use of data analytics and advanced detection tools has helped the government detect and prevent delinquency in relation to input tax credit and facilitate the free flow of input tax credit.
• In its journey of enhancing the ease of doing business initiative, the government consolidated various labour regulations into Four Labour Codes. This will help achieve business objectives by simplifying varied statutes to ensure companies comply, minimise litigation and realign with current business requirements. Personal taxation shows buoyant growth across different income groups bundled with tax-payer-friendly and tax-payer-oriented progressive policies, such as implementing the new tax regime.

Expectations

Top asks:

Ask #1: Enhance export incentives for GCCs

Measures towards expansion of export incentives (such as section 10AA of the IT Act, now defunct) can contribute to the growth and success of GCCs in India while maintaining India's key position as a preferred global hub for business operations. Further, the set-up and operation of new GCCs could be extended with a reduced corporate tax regime of 15 percent similar to new manufacturing domestic companies.

Ask #2: Developing tier 2 locations to become mature GCC hubs

Bengaluru, Hyderabad, Delhi, Chennai, Mumbai and Pune are the prime GCC locations and considered mature hubs for GCC set-ups.
Recently, the growth of these matured hubs has slowed down due to multiple factors. With remote work, the opportunity for GCC talent to work outside these locations became a reality. This has added pressure on their infrastructure, and increasing costs of talent and operations pose a challenge. Consequently, companies are considering alternative locations to set up or expand their operations outside India.

Hence, we should look at developing our tier 2 locations, such as Ahmedabad, Kolkata, Coimbatore and Indore, to attract companies to open/expand their centres in these locations. The government should also work on developing advanced infrastructure and providing a supportive business environment for GCCs. The government should invest heavily in education and training programmes to ensure that the talent in these locations is well-equipped to meet the demands of the niche skills required in GCCs.

The government should consider extending support to GCCs in tier 2 locations through budgetary support measures wherein capital subsidy or payroll subsidy, similar to the policy framework of state government(s), can be provided to nurture GCCs beyond the tier 1 locations. Incentives made available to service enterprises under the Central Government’s “Uttar Poorva Transformative Industrialisation Scheme, 2024 (UNNATI 2024)” for setting up units in Northeast states is a great initiative in this direction; similar schemes should be introduced for other locations.

Ask #3: Extend the advantages provided to the International Financial Service Centre (IFSC) in GIFT City to sectors beyond the financial services industry

With its Special Economic Zone status and various incentives, GIFT City has become an attractive destination for foreign companies. However, the tax benefits for IFSCs (in GIFT City) are currently limited to the financial sector. Broadening these tax benefits to other sectors is essential to unlock the full potential of GIFT City as a hub for GCCs and promote economic growth. While a recent notification issued by the International Financial Services Centres Authority (IFSCA) enabling centralisation of certain functions (bookkeeping, accounting, taxation and financial crime compliance services (BATF services) in the non-financial services industries is a step in this direction. Further, centralising legal, compliance and secretarial services will make the GIFT City proposition more attractive. By way of background, these services and the BATF services were earlier covered under the Ancillary services framework, which could only be rendered to the financial services industry.

Ask #4: Encourage innovation, support start-up ecosystem and promote R&D through weighted deduction

In today’s age, GCCs are transforming into globally integrated innovation-focused strategic hubs by driving innovation through internal initiatives and collaborating with the external ecosystem. Innovation has become a key focus area for GCCs. The government can create incubation hubs for innovation and incentivise GCCs to innovate and generate intellectual property in India. Start-ups should be encouraged to innovate and generate more intellectual property and licences. The government should support technological innovation, promote competition through increased incentives and tax concessions for R&D and attract industry players to invest in more innovation and R&D.
The government may consider restoring weighted deductions for R&D expenditure and donations to scientific research institutions that were available in the past. By reinstating these tax incentives, India can further foster innovation and position itself as a hub for cutting-edge R&D activities, especially for GCCs.

Ask #5: Investing in advanced skill development

As GCCs move up the value chain, they are now driving innovation, digital and technology transformation initiatives. More than 50 percent of India-based GCCs plan to invest in emerging technologies. For example, in the past few years, over 30 new centres for R&D and more than 60 centres for digital work have been set-up in India. To support growth in these new areas, GCCs require skills in areas such as Gen AI, Artificial Intelligence, Machine Learning, Robotic Process Automation, Analytics and Cloud. The demand for these skills will only increase, and India’s ability to attract GCCs will depend on the availability of these advanced skills. Hence, the government should look at supporting stakeholders to open more institutions and labs offering training courses in these areas and encourage current institutions to keep innovating their curriculum with active industry participation from GCCs. The government should also consider large-scale industry internship programmes and incentivise GCCs to invest in skill development (such as the incentive on capital expenditure in manufacturing).

Ask #6: Revision of safe harbour rules to reduce litigation

The government may re-evaluate the safe harbour provisions on three aspects: (1) reduce the class of transactions from the safe harbour and restrict it only for IT, ITeS and business support, etc.; (2) increase the coverage of transactions (such as marketing support and distribution); (3) provide the safe harbour rates closer to comparable benchmarks with a little premium for certainty; and (4) increase the threshold to cover almost 75 percent of the companies under this spectrum. This can serve the dual purpose of providing tax certainty to taxpayers and easing the burden of the APA.

Ask #7: Infrastructure development and sectoral policy interventions by state governments of mature GCC hubs

Most GCCs in India are in Bengaluru, Mumbai, NCR, Hyderabad, Pune and Chennai. However, these big cities are reaching saturation, with infrastructure unable to keep up the pace. There is a need for infrastructure development in these cities. The government should prioritise investing in physical and digital infrastructure and incentivise organisations and state governments to proactively build GCC parks/hubs and infrastructure that can be used for the GCC set-up. This will attract more GCCs and reduce set-up time, which currently runs from 3–9 months for space identification, approvals, physical set-up, etc.

Ask #8: Allowance of GST credit on civil works, immovable property and employee-related expenses

Setting up new GCCs or expanding their footprint entails expenditure on civil works and equipment. Input tax credit under GST laws is not available on civil works and services procured in relation to the construction of immovable property, which increases the overall cost of setting up GCCs in India. This, along with other input tax credit restrictions on employee-related expenses, should be relaxed for exporters of services to align the ITC provisions under GST laws with the government’s policy of exporting the services without taxes.

Ask#9: Sanction of GST refunds for input credit

GCCs can claim a refund of accumulated ITC as they are engaged in the export of services. Various exporters are facing challenges as their refunds get denied by the authorities on various grounds, for example, on the ground that they act as intermediaries between the service recipient and the end customers of such service recipient. While the Government has clarified this, instructions should be issued to strictly follow the same and allow the benefit on the merits of each case. Other procedures, for example, the mandatory rebate mechanism for claiming a refund of credit on capital goods, further increase the operational challenges.

Ask #10: Bengaluru to be considered a metro city for the purpose of 10(13A)

The Constitution of India recognises Bengaluru as a metro city amongst other cities, such as NCR, Mumbai, Kolkata, Pune, Hyderabad and Chennai. Bengaluru is ranked as one of the world’s fastest-growing cities and has provided employment opportunities to many. However, there is a rise in the cost of living in the city compared with other cities. Hence, employees should get the benefit of a 50 percent deduction for HRA.

Ask #11: Focus on the implementation of the new regime

An optional simplified tax regime was introduced in 2020 with the objective of simplifying the tax law for taxpayers and reducing the administration burden for tax authorities. Subsequently, through various budget announcements, measures have been taken to make the new tax regime more attractive. The government may continue this focus and take further measures to promote the new regime by enhancing the standard deduction limit from INR50,000 to INR100,000. This will incentivise the salaried class to drive higher consumption and demand.

Ask #12: Rationalising car perquisite valuation rules for electric vehicles

Income-tax rules provide for the valuation of motor car benefits, where the employer reimburses running and maintenance expenses. The valuation principles consider the cubic capacity of the engine for the purpose of determining the perquisite value and typically cover only conventional fuel cars. No separate criteria has been laid out with respect to electric vehicles. Given the impetus by the government for EVs and coupled with the availability of infrastructure facilities such as fast charging stations in public places such as metro stations, etc, the usage of electric vehicles is rising. Therefore, the finance ministry could consider suitably amending Rule 3 to bring in the valuation mechanism for hybrid and electric vehicle maintenance (recharging batteries in lieu of fuel) and criteria based on battery capacity (besides the engine capacity). Such change in valuation mechanism would bring in clarity and promote the use of electric vehicles for a greener future.

Ask #13: Exempting remittances by employees under overseas stock incentive plans from TCS provisions (applicable on transactions under LRS)

In the Union Budget of 2023, Tax Collection at Source (TCS) for foreign remittances under the Liberalised Remittance Scheme (LRS) was raised from 5 to 20 percent. Employees who are provided with an option to participate in the stock incentive plans of overseas parent company, on acquisition of such shares are treated as payment under LRS, which is subject to TCS levy. Such taxpayers are already paying taxes on income from the exercise of stock options. This levy impacts their cash flow. Hence, TCS may be exempted from such transactions.
In addition, there are certain other provisions which may be relevant to expats, but could be considered to provide relief to this population:

Ask #14: Treaty relief at time of tax withholding

Taxpayers are allowed tax credits/other benefits in terms of taxes paid outside India, subject to the fulfilment of certain conditions. Currently, taxpayers can claim foreign tax credits in their income tax returns. Hence, these taxpayers end up with a huge refund as there is no specific provision for the employer to consider the benefit at the time of tax withholding. To provide legitimate relief to the taxpayers and avoid huge refunds and related cash flow issues, guidelines can be issued for considering benefits under Section 90 at the time of tax withholding and disclosing them appropriately in e-TDS returns.

Ask #15: Enabling the tax payments from overseas bank accounts (removing the requirement of having a bank account in India)

Non-resident individuals, especially foreign nationals, who leave India after closing their bank accounts in India, could get a refund for various reasons. At present, the tax refund is payable only to pre-validated India bank accounts. Any delay in processing the refund could cause bank accounts (even if open under the NRO status) to go into dormant mode. This would prevent the refund from being credited to the account. To alleviate the difficulty, foreign bank accounts should be considered for tax refunds in the case of PAN-holders registered as non-residents/foreign nationals.

Ask #16: Relief from taxability of Overseas retirement benefits

To provide relief to residents who have income from foreign retirement benefits accounts, a new section has been inserted in the Income-tax Act to defer taxation of income from the foreign retirement fund in the year of receipt. Many countries (the US, the UK and Canada) tax the income from foreign retirement benefits accounts on a receipt basis. Moreover, to avoid difficulties in claiming the foreign tax credit due to a mismatch in the year of the taxation, the new section can be applied. However, the government may consider enabling this section to be applied retrospectively, i.e., it should apply to taxpayers who withdraw from the retiral benefit and their past contributions.

Ask #17: Revised/belated return

The due date for filing the revised return or belated returns is 31 December of the following financial year. When the assessee is ROR in India claiming a foreign tax credit, it is difficult to finalise the FTC to be claimed in his India tax return when the return for the calendar year is not yet finalised in the overseas jurisdiction. For example, in the US, returns for 2024 would be finalised only in April 2025. However, the revised/belated returns can be filed for FY2023-24 only until 31 December 2024, to claim the credit for taxes paid for the period of Jan–March 2024. If there is no extension of the due date for belated/revised return filing, the FTC claimed on the return may not be final as it would be claimed on an estimated basis or the taxes withheld at source in the overseas jurisdiction. There is a requirement to extend the due date of filing the revised belated/revised return at least until 31 March, instead of 31 December.