India’s Tax Dilemma is Stifling its Global Capability Centres
17 Mar 2025 / 06 min read
Lowering Safe Harbour margins, establishing a dedicated GCC authority, incentivizing Tier-2 city clusters, and fostering industry-government collaboration can enhance India's competitiveness and attract long-term GCC investments.
For nearly two decades, India has been the undisputed nerve centre of the Global Capability Centre (GCC) revolution. More than 1,700 such centres—operated by multinational corporations—now drive critical business functions from India, employing 1.9 million professionals and contributing over $60 billion to the economy. Once viewed as back-office extensions of global firms, GCCs have evolved into sophisticated hubs for AI research, cloud computing, and high-value financial services.
Yet, even as India's dominance in the sector has grown, cracks are beginning to show. Regulatory bottlenecks—particularly its Safe Harbour Rules (SHRs) for transfer pricing—are making India an increasingly difficult destination for expansion. The very policy intended to provide tax certainty and reduce litigation is now pushing companies to rethink their India strategy.
Introduced in 2013, India’s Safe Harbour Rules were meant to give companies the option of adopting pre-defined profit margins on transactions with their parent firms, shielding them from transfer pricing audits. The goal was to simplify compliance, lower tax disputes, and encourage more firms to expand their India-based GCCs.
In reality, however, the regime has done just the opposite.
The policy mandates profit margins of 17-24%, which companies must report on their Indian operations to avoid scrutiny. This is significantly higher than comparable offshore destinations—5-10% in the Philippines and Poland, for example—making India artificially expensive for multinational firms. GCCs, by nature, do not operate as profit centres but rather as cost centres, designed to support global operations. By imposing unrealistic margins, the tax regime forces firms to declare profits they do not actually generate, resulting in unnecessary tax outflows and an overall loss of competitiveness.
Moreover, safe harbour rules do not truly guarantee protection from tax scrutiny. Despite opting for the prescribed margins, many firms still face audits and disputes, leading to prolonged litigation and uncertainty. That defeats the very purpose of the policy.
India’s stringent transfer pricing regulations have created an unexpected advantage for rival destinations. Vietnam, Poland, and the UAE—all of which have been aggressively wooing GCCs—offer more predictable tax regimes with lower safe harbour margins and more flexible compliance mechanisms.
Many multinational firms are responding by diversifying their footprints. India remains the dominant player, but high-value functions such as AI-led R&D, cybersecurity, and financial analytics are now being set up outside India in countries where tax structures are friendlier. This shift is not dramatic yet—but it is steady.
India’s regulatory approach stands in contrast to global best practices. The OECD Transfer Pricing Guidelines, followed in most mature economies, emphasize the arm’s length principle (ALP)—which allows pricing to be determined based on market conditions rather than rigid pre-set margins.
India’s IFSC GIFT City model provides a compelling case study on how tax certainty and regulatory clarity can drive investment. GIFT City was designed to compete with global financial hubs, offering tax predictability, infrastructure advantages, and business-friendly policies.
Key incentives offered in GIFT City include:
100% income tax exemption for 10 years (out of 15 years).
Exemption from GST on offshore services.
No dividend distribution tax or capital gains tax on certain financial transactions.
Single-window clearance under a unified regulator, reducing bureaucratic friction.
India can strengthen its GCC ecosystem by adopting lessons from GIFT City. Safe Harbour margins should be lowered from 17-24% to 8-12%, with a tiered tax system offering 5-10 years of stability. A dedicated GCC regulatory authority, similar to the IFSC Authority, should streamline compliance, taxation, and policy advocacy. Tier-2 cities like Indore, Coimbatore, and Jaipur should be developed into GCC clusters, with SEZs, infrastructure subsidies, and lower operational costs. Finally, a GCC-Industry Task Force, modeled on NITI Aayog’s consultative framework, should oversee policy revisions and global competitiveness, ensuring continuous dialogue between industry and government.
Countries such as Singapore and the UK have moved towards Advance Pricing Agreements (APAs), where firms and tax authorities agree on customized transfer pricing arrangements for a fixed period. These provide companies with predictability without forcing them into unrealistic margins. India’s failure to adopt such a framework puts it at odds with modern tax regimes.
Even within the Indian legal framework, the SHR system is seen as flawed. Courts have ruled that tax authorities cannot reject lower-margin justifications outright, but litigation remains rampant. Tax assessments are often aggressive, driven by revenue targets rather than sound economic principles. The lack of clear dispute resolution mechanisms makes the process expensive and time-consuming.
India’s policymakers have two choices—modernize the safe harbour regime or risk losing the competitive edge that has made the country the world’s leading GCC hub. A reformed tax policy could unlock billions in new investment, but failing to act could mean a gradual but irreversible erosion of India's dominance.
Four immediate reforms could reverse the damage:
Reduce Safe Harbour Margins: Align them with international benchmarks (8-12%) to prevent over-taxation of GCCs.
Expand Safe Harbour Eligibility: Remove turnover restrictions and extend benefits to high-end innovation hubs.
Introduce an APA Mechanism: Replace rigid margins with case-specific tax agreements, allowing flexibility without prolonged litigation.
Ensure Tax Certainty: Restrict tax authorities from auditing firms that opt into safe harbour, providing genuine regulatory relief.
The finance ministry has acknowledged the need for reforms, but bureaucratic inertia remains a problem. In the absence of change, GCCs will not disappear overnight—but their future investments might. India’s status as the default GCC destination is no longer assured.
The global tax landscape is evolving, and India can either adapt or be left behind.
