In this insightful series, we delve into the structural models for establishing a Global Capability Centre (GCC) in India, examining the associated tax implications and the incentives provided by state governments to attract these centers. This article focuses on a critical, yet often overlooked challenge: effectively launching a GCC and ensuring its smooth operation. Many multinational corporations (MNCs) venturing into India to establish GCCs may lack familiarity with the country’s legal and regulatory environment. Often, they prioritize speed over structure, which can prove costly. Missteps in the initial stages can have long-term repercussions.
Once a GCC becomes operational, its in-house legal team is rarely equipped to handle the full spectrum of issues, leading to gaps in contract management, inconsistent handling of employment issues, missed regulatory updates, and inadequate intellectual property (IP) documentation. A law firm experienced in handling GCCs can serve as a true partner, helping to establish the legal infrastructure necessary to manage operations at scale.
Part I: Establishing a GCC — Common Pitfalls for MNCs
Structuring from an Exchange Control and Tax Perspective
India’s foreign exchange regulations govern the influx of foreign investment. As discussed in this series, various models exist for setting up and operating a GCC in India, each with distinct cost structures, tax implications, and control levels. The choice of model influences the Indian entity’s income tax liability, transfer pricing obligations, permanent establishment risk, and GST treatment. Law firms can provide guidance on the most suitable structure, and a well-considered framework can help avert the need for restructuring in the future.
Establishing the Indian Entity
Typically, this involves incorporating a private limited company. The charter documents of a GCC usually include provisions governing the relationship between the Indian entity and the foreign parent, share transfer restrictions, and decision-making thresholds. MNCs often find that their standard templates do not adequately reflect operational needs. Expert advice on incorporation and the drafting of charter documents is crucial.
Registrations, Licences, and Office Space
A newly established entity requires various registrations before commencing operations, including PAN, TAN, GST, Shops and Establishments, Professional Tax, and PF and ESI registrations. Delays in this process can slow down hiring and operations commencement. Depending on the GCC’s activities, additional licences may be required, such as those under the STPI scheme or state IT/ITES policies. Most GCCs lease commercial premises, often under one-sided landlord agreements, which may include high deposits, onerous lock-in periods, and inflexible terms.
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Part II: Ongoing Legal Support — Infrastructure for Growth
Once operational, a GCC’s legal needs diversify. Managing numerous contracts, a substantial workforce, regulatory obligations, and cross-border data operations cannot rely solely on a small in-house team. The following areas highlight where ongoing law firm support can provide significant value:
Legal Processes and Regulatory Updates
A growing GCC requires scalable legal processes, such as a contract management framework, an authority matrix for clause approvals, and a compliance calendar with clear responsibilities. Well-structured legal processes help manage crises effectively and are more cost-efficient than crisis responses. India’s legal landscape changes frequently, with recent developments like the labour codes and the Digital Personal Data Protection Act, 2023. Law firms can offer tailored, regular updates to GCCs based on their specific activities and risk profiles.
Contract Templates and Training
A repository of well-drafted contract templates, reviewed for tax, IP, and data protection considerations, allows teams to handle routine transactions swiftly. These templates require updates as laws change and as the GCC’s relationships evolve. Legal risks in a GCC are often managed by teams interacting with commercial partners, handling employee issues, and processing personal data. Regular training on contract fundamentals, data protection, employment law, and IP is a cost-effective strategy to manage risks proactively.
Employment
Employment matters consistently demand the most legal attention for GCCs in India. The large workforce, evolving regulatory landscape, and the complexity of managing personnel across borders create a continuous need for legal support. Law firms provide valuable assistance in drafting and maintaining employment contracts and HR policies, advising on labour codes, supporting exit processes, and managing disputes in Labour Courts or Industrial Tribunals.
Disputes, Tax, IP, and Data Protection
GCCs face potential disputes related to vendor relationships, employment claims, IP issues, and regulatory and tax proceedings. Well-drafted contracts with clear dispute resolution clauses enhance the ability to manage disputes effectively. Transfer pricing compliance, GST, and the tax implications of structural changes require ongoing attention. An integrated approach combining corporate, employment, and tax practices is beneficial, considering the tax dimensions of key decisions.
IP generated by GCC employees is a significant asset for the MNC group, requiring careful management of ownership and protection. Contracts must include appropriate IP assignment provisions, and intercompany arrangements need to reflect IP ownership and licensing terms. The Digital Personal Data Protection Act has altered the obligations for entities processing personal data in India. For GCCs, which often handle large volumes of employee and customer data, a robust data protection framework is essential.
Conclusion
The opportunity for GCCs in India is substantial and growing. MNCs that benefit the most are those that establish the right structure from the start and build the infrastructure to support the GCC as it grows. Law firms play a crucial role in this process by being genuine partners in designing processes, training teams, and offering specialized advice in areas like employment, tax, IP, and data protection. GCCs that invest in long-term partnerships with law firms tend to scale more effectively and face fewer legal challenges.
About the authors: Siddhi Ghatlia is a Partner and Khusbu Jasani is a Principal Associate at ALMT Legal.
Disclaimer: The views expressed in this article are those of the author(s) and do not necessarily reflect the views of Bar & Bench.
