Introduction
A Global Capability Centre ("GCC"), while lacking a formal definition, can nonetheless be described as an offshore or nearshore entity controlled by a parent company, and which can provide a wide array of specialised services, ranging from information technology and research & development to complex back-office functions. GCCs, as opposed to traditional back-office business process outsourcing units, are marked by high digital technology penetration and deliver complex work that requires a significant understanding of business context and imperatives. They may also service client needs or research imperatives, independently from the day-to-day involvement of their parent entity.
GCCs may be functionally distinguished from global business services organisations ("GBSs"), which are closer to conventional back-offices, transform how services are delivered through continuous improvements and offer support through integrated help desks, intelligence centres and operational command hubs in fields such as marketing, supply chains and logistics, and transformation capabilities. GCCs can exist parallelly with GBSs, or have the operations of a GBS integrated within themselves.
GCCs and India
Evidently, India has emerged as the premier global destination for entities to set up GCCs. This has been made possible due to an affordable and versatile talent pool, lower comparative costs of setting up and scaling operations, a friendly, yet liberalising foreign investment regime, and gains in the ease of doing business.1 India has also been labelled as the "GCC capital of the world", with more than 2,975 GCC units housing more than 6,500 global roles registering a compound annual growth rate (CAGR) of roughly 60% for GCC units between FY2019 and FY2024.2 The Economic Survey, 2023-24, notes that "GCCs have made a mark in key industry verticals such as banking and financial services, software, telecom and semiconductors, with a growing concentration in aerospace, automotive, oil and gas, healthcare and pharma."3 GCCs are an important economic asset for India, having generated a combined revenue of US$ 46 billion, and 23% of the country's information technology exports. By 2030, revenues from GCCs in India are expected to exceed US$ 121 billion, amounting to roughly 3.5% of India's GDP.4
Further, GCCs in India are not exclusively foreign-controlled but are also being established by Indian entities attempting to have a leaner organisational structure with specialisation gains. More than 50 Indian entities have thus established GCCs in India, with varying sectoral focuses across established locations, tier-II cities, and even the GIFT International Financial Services Centre ("GIFT IFSC").5
Evolution of GCCs in India
The origin of GCCs is closely tied to the growth of business process outsourcing units and back offices in India. The commencement of Texas Instruments' software design centre in 1985 in Bengaluru can be considered the first GCC to be set up in India.6 As India underwent liberalisation, MNCs began setting up back-offices, which, over time grew in sophistication and scope to become 'captive centres'. These captive centres were often limited to particular tasks such as information technology support, finance and customer support services. However, the readily available cost arbitrage of engaging in intellectual property generation and research & development in India led to MNCs increasing their facilities' scale as well as sophistication. Over time, the operations of such captive centres became more vertically and horizontally expansive and integrated. Starting off with tasks such as handling workflow obstructions, facilities came to engage in complex operations such as systems integration, component design and commercial research & development. When the focus of such captive centres shifted from operations support to innovation, a distinction came to be drawn between GBSs and global in-house centres ("GICs"). These GICs, when they came to mature through further scale, capabilities, and integration, have come to be known as GCCs.7 The evolution of GCCs, thus, is intricately tied to India's openness to foreign investment, the quality of its higher education institutions, ease of doing business, and its own rapid economic growth. Some industry voices advocate that GCCs having their principal focus on deep tech applications, such as generative AI, advanced materials science, non-silicon semiconductors etc. be instead termed as 'global innovation centres'.
India hosts GCCs from most of the world's readily recognisable entities, such as Microsoft, Google, and Amazon. These GCCs have become enmeshed in India's innovation ecosystem; the Samsung Research Institute Bangalore, being Samsung's largest research & development centre beyond South Korea, has been instrumental in the development of Samsung's flagship Exynos processors,8 and even runs programmes in educational institutions to upskill engineering students.9
Navigating India's Legal Landscape: A GCC Perspective
Interestingly, one may note that there is no separate legal or policy framework in place by the central government for GCCs, making any analysis of a particular GCC's legal requirements subject to state and local laws, sector-specific laws, and their interface with specific regulatory agencies. In general, initiatives such as 'Digital India', 'Make in India', and 'Start-up India' have boosted the overall potential of GCCs by incentivising technology and engineering applications. Likewise, the widespread proliferation of digital public infrastructure such as the Jan Dhan—Aadhar—Mobile (JAM) trinity and India Stack, coupled with affordable internet has greatly expanded the market reach and consumer base for GCCs and their parent entities. A few perspectives on certain legal considerations concerning GCCs are discussed below.
Jurisdiction and Location
Nonetheless, certain states in India recognise GCCs as stakeholders in enhancing their economic profile and contributing to their gross state domestic product (GSDP). In line with the principle of competitive federalism, the following state governments have introduced GCC-specific policies.
- Karnataka, the largest domicile for GCCs in India having roughly 30% of all GCCs in India, has introduced the Karnataka GCC Policy 2024-2029 ("Karnataka GCC Policy").10 The Karnataka GCC Policy targets the establishment of 1,000 GCCs by 2029, with 3.5 lakh jobs being generated and US$ 50 billion worth of economic output. Under the Karnataka GCC Policy, three new technology parks (being named global innovation districts) will be established, with a dedicated coordination office for GCCs. An innovation fund will be established, and a GCC acceleration and investment council will be set up, among other endeavours.
- Uttar Pradesh, having made large capex commitments, is keen on attracting GCCs. The state already hosts large industrial and technology parks, with 40 information technology parks and 25 special economic zones ("SEZs"), along with outlays for a semiconductor park, defence corridor, electronics park, and artificial intelligence (AI) city. Under the Uttar Pradesh GCCs Policy 2024 ("UP GCC Policy"),11 1,000 new GCCs are targeted with 5 lakh jobs being created. The UP GCC Policy offers subsidies on capital expenditure by GCCs, land subsidies, exemption on stamp duty, subsidies on employee costs, and reimbursement on statutory fees for filing intellectual property registration applications. The UP GCC Policy further intends, inter alia, to set up a dedicated technical support group for GCCs, exemptions from regulatory inspections, facilitation of tie-ups with educational institutions, and a digital portal of available commercial real estate listings.
- States such as Maharashtra have also announced their engagement with relevant stakeholders to formulate their own respective GCC policies.
- Additionally, India has several SEZs set up under the SEZ Act, 2005, which offer particular incentives which GCCs may avail. Further, services delivered to businesses operating in an SEZ are "zero rated" (and therefore not taxed). Incubation hubs and innovation centres, likewise, offer a multitude of measures. Certain states have sector-specific and location-specific subsidies and schemes which may also apply to GCCs.
- Further, GCCs may also be set up as entities in GIFT IFSC, which will make such GCCs subject to regulations framed by the universal regulator for GIFT IFSC viz. the International Financial Services Centres Authority ("IFSCA"), and be categorised as "person resident outside India" under the [Indian] exchange control regulations, exempting them from the said regulations' restrictions on receiving funds from entities domiciled abroad. Notably, the IFSCA has made the IFSCA (Global In-House Centres) Regulations, 2020, which mandate separate registrations for captive GCCs in the GIFT IFSC.12
For GCCs to evaluate which jurisdictions and locations to select within India, a case-to-case cost-benefit analysis will have to be made.
Corporate Structuring
GCCs can be either captive, where the parent entity maintains overwhelming control over the GCC, or depend on outsourcing functions to third parties for outsourced GCCs. Each approach has its pros and cons, with the former requiring more up-front investment and undertaking a greater compliance burden, yet having greater organisational and strategic synergy with group entities. The latter, while easier to set up, will have inherent contract-related risks and concerns surrounding data security due to the involvement of third parties. The inter-se division of responsibilities and rights will vary from entity to entity.
Likewise, three models can be broadly adopted for setting up GCCs.
- Services Agreement Model, where the GCC will be solely owned by the parent entity (or its affiliates). If the parent entity is engaging facilitators ("Facilitators") under a build-operate-transfer arrangement, the parent entity will typically enter into a services agreement (or a statement of work under an umbrella master services agreement) with the Facilitator for the planning and set up of the GCC. Once the GCC has been established, a separate services agreement (or Statement of Work) between the GCC and the Facilitator for ongoing back-office support services for the GCC will have to be executed. Parent entities will often use special purpose entities (SPEs) to hold their ownership interest in the GCC and in contracting with Facilitators, to reduce liability exposure.
- Joint Venture Model, where the Facilitator will hold a minority equity interest in the GCC. In addition to the services agreement(s) described above, there will be a joint venture agreement recording the understanding of the parties with respect to the governance of the GCC and the parties' ownership interests in the GCC. The joint venture agreement will provide for the formation of either a private limited company or a limited liability partnership in India as the GCC entity. There may be a buy-out of the Facilitators' share in the GCC, whether based on a time threshold or metrics tied to the performance of the GCC.
- Virtual Captive Model, where a bridge period prevails during which the Facilitator sets up, owns and operates a "virtual" GCC that is dedicated to providing IT and business services to the Company until the Company is prepared to assume ownership and operate the GCC.Unlike the services agreement and joint venture models in which the Facilitator only supports the back-office operations of the GCC, a Facilitator under the virtual captive model will be directly involved in providing IT and business services (and personnel) to the Company. Concerns such as the nature of transfer (share transfer, asset transfer, or business transfer) and transfer of personnel (applicability of transfers without entitlement under section 25FF of the Industrial Disputes Act, 1947) must be considered in the case of a virtual captive model.
The selection of which model is to be adopted would largely depend on a host of factors, including the value proposition and skills brought in by the Facilitators, the location of the intended GCC, and the structuring of the GCC's business operations vis-à-vis the rest of the group.
Permanent Establishment Risk
The overseas group entities of GCCs incur the risk of falling within the ambit of having a "permanent establishment" (PE) in India in terms of (Indian) taxation law. In the event that a GCC is categorised as a PE for its foreign group entities, the tax burden on the GCC can climb up to higher percent of taxation as applicable to a foreign entity, along with an increased compliance burden via, among others, filing of tax returns, maintaining necessary books of account (audited and reported), withholding taxes, undertaking resultant obligations etc.
Compared to other means of establishing a permanent establishment, GCCs are vulnerable to potentially establishing fixed-place and service forms of permanent establishment.
- The key consideration for evaluating fixed-place permanent establishment includes the nature of activities undertaken by the GCC and the extent of foreign group entities' involvement. It is essential to ensure that the nature of activities undertaken by the GCC's foreign group entities and the GCC are duly reported in the transfer pricing analysis being conducted in India, with adequate compensation being accorded to such foreign group entities on an arms-length basis to prevent the formation of a fixed-place permanent establishment.
- Service permanent establishments come into being primarily due to the continuous influx of foreign group entities' personnel to the GCC, and vice versa. The nature of activities/services rendered to the GCC (e.g., the duration, the manner of providing such services, the designations assumed etc.) are important in assessing the existence of a service permanent establishment. When the employees of foreign group entities engage with Indian GCCs, a clear bifurcation based on the activities they would be expected to undertake ought to be made.
Relocation of the group's personnel to GCCs on a secondment basis, where during the tenure of such secondment the GCC remains both the de jure and the de facto employer of such personnel, is a solution which can be taken recourse to for minimising service permanent establishment risk. However, the services provided by foreign group entities under a secondment arrangement could be construed as service to the GCC by the "real employer", where the Hon'ble Supreme Court has prioritised substance over form for making such determination.13 Accordingly, the reimbursement of salaries of the secondees may be taxed as an import of manpower supply services, attracting goods and services tax (GST) on such transactions.
Data Privacy and Data Transfers
Currently, the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 stipulates privacy obligations for Indian entities. These rules require all private entities that process personal data (especially sensitive personal data or information) within India, or that use computer networks in India, to do so with explicit consent and per privacy policies mandated to be made public by such entities. However, the Ministry of Communications and Information Technology issued a clarification on August 24, 2011, which came to exempt the processing of sensitive personal data received by GCCs from jurisdictions outside India under any Group or third-party arrangements.14 Since then, GCCs in India are largely required to ensure compliance only with regulations such as the European Union's General Data Protection Regulation ("GDPR") or the California Consumer Privacy Act, 2018 ("CCPA") and putting in place appropriate data transfer arrangements for cross border transfers. Thus, GCCs have been provided significant latitude with regards to processing personal data. However, the same is all set to change when the (Indian) Digital Personal Data Protection Act, 2023 ("DPA") read with relevant rules thereunder, is brought into effect as on a yet undeclared date.
The DPA governs the processing of digital personal data within India and even outside India when goods or services related activities are offered in India. The DPA is a highly consent-centric legislation, where clear consent from an individual must be obtained by any data fiduciary, i.e., the entity which determines the purposes and means of processing, before it can collect and process a person's data. Where GCCs are able to clearly demonstrate that processing is necessary for: (i) the purposes of employment (payroll, employee training, maintenance of employee records), or (ii) safeguarding the employer from liability (implementing security measures such as access controls, encryption and user authentication, or conducting security audits on company network and system), or (iii) providing benefits sought by the employee (such as gratuity, provident fund, healthcare benefits, insurance coverage, or wellness programmes), they can seek to undertake such processing under legitimate use, circumventing consent requirements. For activities falling beyond the scope of the prescribed legitimate use or where the data does not relate to employees (with non-employees including consultants and service providers), explicit consent will nonetheless have to be obtained (and maintained) against a valid and subsisting privacy notice.
Under the DPA, the processing of "personal data of individuals based outside India by any person in India pursuant to a contract" is exempt from most material requirements, except the obligation to maintain reasonable security standards. The exclusion pertains to data of "individuals based outside India", and does not apply to processing of personal data by GCCs pertaining to individuals in India (including employees of the GCC's group/ the GCC/ or Indian customers of the GCC's group who contract with it offshore). Pertinently, this exclusion is linked to "residency" and not citizenship or nationality of the data subject. This factum will necessitate a review of existing data collection and analysis arrangements for GCCs to be ready for the DPA's implementation.
Where the GCC may, by design or by default, eventually end up providing services with underlying datasets having data from Indian persons ("Loop Back Data"), or where datasets being processed by the GCC or its foreign group entities contain Loop Back Data, the DPA's consent and notice requirements become mandatory. In such cases, the processing of "Indian" data by GCCs, as a processor for the parent entity or its group, becomes subject to the DPA's stringent requirements:
- If the GCC and its foreign group entity independently determine the purpose and means of processing datasets containing Loop Back Data, both entities will be data fiduciaries under the DPA, and both may be required to demonstrate consent for such processing.
- Where the foreign group entity solely determines the purpose of processing, the GCC will be a data processor on behalf of the group entity. While the consequences of a breach of the DPA may lie with the foreign group entity, the GCC's presence in India may make it prone to regulatory scrutiny, particularly in case of breaches in securing unconsented data.
The mammoth changes which the DPA is poised to cause with its operationalisation will require a thorough revisiting of the contractual, operational, and technological arrangements in place between the GCC, its data subjects, and its foreign group entities.
Regulatory Overhaul
In addition to the DPA, a number of key legislations are slated to repeal and replace existing frameworks. The DPA itself awaits the all-important rules under the same, which will provide details and mechanisms for its operation. The SEZ Act, 2005, is expected to undergo major modifications following the passage of the SEZ (Amendment) Bill, 2024. Likewise, the Information Technology Act, 2000, is intended to be replaced by the Digital India Bill, 2023. Three of the four labour codes, despite being enacted, await implementation as well. Besides, there are also possibilities of data localisation requirements being expanded, which will have its bearing on GCC's operations.15 The ongoing regulatory changes in India will require GCCs to be adaptive, and be ready to weather teething troubles arising therefrom.
Geopolitical Risks
GCCs, being exposed to foreign economic flows and conditions, will be particularly sensitive to geopolitical conditions resulting in economic impact. The incoming Trump administration is perceived to be a positive for Indian GCCs, where American companies are expected to invest more in the Indian GCC ecosystem, especially in the IT sector16. Strategic competition of the US with China, as well as rising labour costs in China, will augment investment flows to India. After the Covid-19 crisis and ongoing global conflicts since then, the importance of resilient supply chains have also become apparent, whereby foreign entities are keen to shift some of their supply chains away from China, with India being a prime contender to gain such business. The general instability in the world will affect India differently at different times; while the mainstreaming of the 'China + 1" strategy has been corralling western inflows to India, the US has been imposing prohibitive tariffs on specific industries India to further its own reshoring and near-shoring initiatives.17 Likewise, the ongoing détente between China and India may result in economic cooperation intensifying in a cautious manner, but with also an American retaliation in order. India's attempts at increasing trade with Russia may also result in systemic risks from international sanctions unintentionally impacting entities which may be engaged with sanctioned entities. The developing situation in Bangladesh has also impacted India-based entities which were servicing the textile, tea, medical devices and other sectors in various ways. The lines between geopolitics, economics, and the law have been increasingly blurry, and precipitously susceptible to rapid shifts. GCCs and their foreign group entities will necessitate structural nimbleness and geopolitical risk assessment on a continuous basis.
Future of GCCs in India
The ongoing GCC bloom in India is the result of a fortuitous combination of ease of doing business and a welcoming business environment. GCCs will continue to remain sensitive to regulatory minutiae as well as the health of the global economy. The need of the hour is to have industry-led regulations and the adoption of not just industry consultation, but industry standard-setting as a new regulatory norm through bodies such as the Industry Standards Forum.18 Clear timelines for implementation of new regulations and legislation, as well as alignment with international regulatory standards will bring in the much-needed visibility to entities which will have to revisit their processes due to such changes. The revamping of the SEZ Act, 2005, to have corresponding sector-specific SEZs in the nature of International Financial Services Centres ("IFSCs"), with unified regulators like the IFSCA for such sector-specific SEZs, can be a game changer for GCCs and domestic entities alike. The emergence of GCCs was a natural corollary of the liberalisation process which commenced in 1991; maintaining the reform and light-touch regulation impetus will be key in advancing the GCC story.
Footnotes
1 GCC Setup Location Analysis | Zinnov
2 zinnov-india-gcc-landscape-the-5-year-report.pdf
4 Global firms are tapping India's workers like never before
5 India Inc too riding GCC wave
6 TI Celebrates 20 Years as a Technology Innovator in India | Texas Instruments India
7 GCC_Report_V6_Digital-compressed-1.49-MB_compressed.pdf
8 'Many innovations were born at Samsung's India R&D unit' | Mint
10 Karnataka unveils India's first GCC policy at Bengaluru Tech Summit
11 invest.up.gov.in/wp-content/uploads/2024/09/Draft-UP-GCC_280924.pdf
12 International Financial Services Centres Authority
13 CC, CE & ST Vs Northern Operating Systems Pvt Ltd, 2022 (Civil Appeal No. 2289-2293 OF 2021) https://taxindiaonline.com/RC2/caseLawDet.php?QoPmnXyZ=MTcxNDY2
16 What Trump's win in US elections means for Indian IT services sector- The Week
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