Compliance with Indian Tax Laws for GCCs
Future of work

Compliance with Indian Tax Laws for GCCs

By 
Aushini
|
November 27, 2024
clock icon
5
 minute read

Executive Summary

India's complex and evolving tax landscape poses significant financial and reputational risks for GCC companies. Indian tax regulations are complex and multifaceted, involving various statutory requirements under Income Tax, Goods and Services Tax (GST), and Transfer Pricing laws. Non-compliance can result in hefty penalties and legal troubles. 

India's corporate tax rate is comparable to that of its competitors, the Philippines (25%) and Malaysia (24%). However, India has more complex tax rules and regulations, which can lead to increased audits and potential disputes with tax authorities.

For GCCs operating in India, navigating this regulatory environment requires a thorough understanding of these laws and implementing robust compliance strategies

Understanding the Indian Tax Landscape

Overview of the Indian Tax System

India's tax system is a dual system comprising direct and indirect taxes.

Direct Taxes

  • Imposed directly on individuals or corporations.
  • Primary tax is Income Tax, levied on income earned by individuals, companies, and other entities.
  • Other direct taxes include Fringe Benefit Tax, Securities Transaction Tax, Dividend Distribution Tax, and Wealth Tax.

Indirect Taxes

  • Imposed on goods and services.
  • Goods and Services Tax (GST) is the primary indirect tax, subsuming multiple indirect taxes like excise duty, service tax, VAT, and central sales tax.
  • Other indirect taxes include Customs Duty, Central Excise Duty, and State Value Added Tax (in certain states).

A foreign company setting up a GCC in India can consider two options: a Special Economic Zone (SEZ) or a Software Technology Park (STP). Both offer tax benefits. 

SEZs provide tax concessions on operations, while STPs offer import tax benefits, especially useful for companies using high-tech equipment. STPs have no location restrictions, unlike SEZs

Key Tax Laws Impacting GCCs

  • Income Tax Act, 1961: Governs taxation of income earned in India, including income from business operations, investments, and capital gains.
  • Goods and Services Tax (GST) Law: Regulates taxation of supply of goods and services within India.
  • Customs Act, 1962: Governs import and export of goods, including valuation, classification, and duty assessment.
  • Foreign Exchange Management Act (FEMA): While not strictly a tax law, it has significant implications for cross-border transactions and repatriation of profits.

Recent Tax Reforms and Their Implications for GCCs

India has undertaken significant tax reforms in recent years, impacting GCC businesses:

  • Corporate Tax Rate Reduction: Lower corporate tax rates have improved the investment climate but require careful tax planning to maximize benefits.
  • Facilitation of Foreign Investment: Measures like relaxed FDI norms and tax incentives have attracted GCC investments, but compliance with specific conditions is crucial.
  • GST Implementation: While GST has simplified indirect taxation, challenges related to input tax credit, classification, and valuation persist.
  • Focus on Transfer Pricing: Increased scrutiny of transfer pricing necessitates robust documentation and compliance.
  • Digital Taxes: Proposed digital services tax and equalization levy can impact the profitability of digital businesses.

Emerging Tax Challenges and Trends

GCC companies operating in India face the following emerging tax challenges:

Transfer Pricing: 

Determining the arm's length price of transactions between related parties is complex and subject to intense scrutiny. 81% of CXOs mentioned transfer pricing as the top regulatory priority for GCCs in India.

Base Erosion and Profit Shifting (BEPS): 

Global initiatives to address BEPS impact the Indian tax landscape, requiring proactive compliance measures.

Digital Personal Data Protection Act (DPDPA) :

India's Digital Personal Data Protection Act (DPDPA) establishes a framework for safeguarding individual privacy by regulating the processing of digital personal data. It applies to any organization collecting, storing, or using the personal data of Indian citizens, regardless of the organization's location. 

The DPDPA defines key stakeholders including:

  • Data Principal: The individual whose personal data is being processed.
  • Data Fiduciary: Any entity determining the purpose and means of processing personal data. 
  • Data Processor: An entity processing personal data on behalf of a Data Fiduciary. 

Tax Dispute Resolution: Timely resolution of tax disputes is crucial to avoid litigation and interest costs.

Advance Pricing Agreements (APAs): 

Entering into APAs can provide certainty and reduce transfer pricing risks. The government introduced an APA program in 2012 (through the Finance Act, 2012) to provide enhanced tax certainty to MNEs in India. 

The Indian APA regime now includes three types of APAs: 

  • Unilateral APA (UAPA)
  • Bilateral APA (BAPA), and 
  • Multilateral APA (MAPA). 

APA applications cover three business sectors: manufacturing, trading, and services, with most applications from the service sectors, particularly the IT and ITeS sectors. 

While a UAPA offers unilateral tax certainty in India to the taxpayer for the pricing of its related party international transactions, a BAPA/MAPA provides bilateral/multilateral tax relief to the MNE group as a whole both in India and other foreign jurisdictions involved in the group’s related party international transactions.

Understanding these aspects is crucial for GCC companies to effectively navigate the Indian tax landscape, mitigate risks, and optimize tax liabilities.

Income Tax Compliance

Corporate Tax Obligations

Taxation Framework: GCCs must navigate India’s corporate tax structure, including the applicable rates and potential exemptions. Key areas include determining taxable income, understanding profit attribution rules, and leveraging incentives under the Income Tax Act and Special Economic Zones (SEZ) for operational advantages.

Filing and Reporting

  • Timely filing of annual tax returns and quarterly advance tax payments is essential. 
  • Adherence to digital filing requirements and deadlines, including Form 29B for tax audits and Form ITR for income tax returns, is critical to avoiding penalties and interest.
  • Assess ‘substance over form’ to substantiate access to the Tax Treaty for favorable taxation.
  • Validate secondment arrangements to prove economic employment with the Indian GCC

Documentation and Record-Keeping

Comprehensive Documentation: Maintain detailed records of all financial transactions, tax filings, and audit reports. This includes supporting documents for deductions, credits, and exemptions. Implement a robust document management system to ensure accuracy and accessibility.

Internal Controls: Establish strong internal controls for financial reporting and tax compliance to prevent errors and fraud. Regularly review and update these controls to adapt to changes in tax regulations.

Goods and Services Tax (GST) Compliance

GST Registration Requirements

Registration Criteria: Determine GST registration requirements based on turnover thresholds and the nature of supplies. Ensure timely registration to avoid disruptions in operations and legal non-compliance.

Process Optimization: Streamline the GST registration process through automation and integration with financial systems to ensure efficient handling of GST compliance.

Filing GST Returns

Return Types and Timelines: Ensure accurate and timely filing of various GST returns (e.g., GSTR-1 for outward supplies, GSTR-3B for a summary of inward and outward supplies). Implement processes to reconcile GST returns with financial records to avoid discrepancies.

Automated Solutions: Utilize automated GST filing solutions to enhance accuracy and efficiency in return preparation and submission. Regularly monitor and audit GST filings to ensure compliance.

Input Tax Credit (ITC)

Eligibility and Claims: Assess and claim ITC based on eligible inputs and services used for taxable supplies. Ensure compliance with documentation requirements to substantiate ITC claims.

Reconciliation and Optimization: Conduct periodic reconciliation of ITC claims with GST returns and supplier data. Optimize ITC claims by leveraging technology to track and manage eligible credits

Transfer Pricing Regulations

Overview of Transfer Pricing Rules

Arm’s Length Principle: Ensure that inter-company transactions adhere to the arm’s length principle. Implement transfer pricing policies that align with global standards and local regulations.

Documentation Standards: Develop and maintain comprehensive transfer pricing documentation, including functional analysis, economic analysis, and benchmarking studies, to support the arm’s length nature of transactions.

When creating a transfer pricing policy, it’s essential to comprehensively document the functions, assets, and risks (FAR) analysis. Subsequently, the FAR analysis serves as the foundation for establishing the transfer pricing policy and compensation structure for the GCC.

Compliance and Reporting

Documentation Preparation: Prepare and update transfer pricing documentation annually, including Master File, Local File, and Country-by-Country Report, as required by Indian regulations.

Regulatory Filings: File Form 3CEB with the Income Tax Department to report international transactions. Ensure timely and accurate submission to avoid penalties and ensure compliance with transfer pricing regulations.

Employment Taxation and Compliance

Withholding Taxes

TDS Management: Accurately compute and deduct Tax Deducted at Source (TDS) on employee salaries and other payments. Ensure compliance with TDS rates and timely remittance to avoid interest and penalties.

Reporting and Compliance: File TDS returns (e.g., Form 24Q for salaries) and issue TDS certificates (Form 16) to employees. Implement systems to automate TDS calculations and filings for accuracy and efficiency.

Employee Benefits and Taxation

Tax Treatment of Benefits: Understand the tax implications of various employee benefits, such as perquisites and allowances. Ensure proper reporting and compliance with tax laws regarding employee benefits.

Compliance Framework: Develop a framework for tracking and reporting employee benefits to ensure compliance with tax regulations and avoid disputes with tax authorities.

By adopting these high-level strategies, GCCs can ensure robust compliance with Indian tax laws, effectively manage risks, and optimize their tax position while aligning with regulatory requirements

Conclusion: Assessing GCC Exposure to Indian Tax Risks

Global Capability Centers (GCCs) face significant tax risks due to India's complex regulatory environment, which includes Income Tax, GST, and Transfer Pricing. 

Key risks include -

  • compliance with the arm's length principle for inter-company transactions
  • managing GST registration and Input Tax Credit (ITC) claims, and 
  • accurate handling of employment taxation, including TDS and employee benefits. 

A thorough analysis of the entity structure, financial performance, and historical compliance is essential for understanding these risks and identifying areas for improvement.

Evaluating the existing tax compliance framework involves

  • reviewing current reporting and filing processes
  • assessing internal controls, and 
  • ensuring robust audit trails. 

A gap analysis helps pinpoint discrepancies between current practices and industry best practices, leading to actionable recommendations for enhancing compliance and addressing identified risks.

Developing a comprehensive tax compliance framework requires strategic planning including creating a detailed roadmap and implementing strong governance and control mechanisms. 

Leveraging technology, such as automation tools and data analytics, is crucial for streamlining compliance and enhancing accuracy. 

Building a skilled tax compliance team and fostering cross-functional collaboration further supports effective tax management and risk mitigation.

Related Posts

Future of work
Future of work
Future of work