India stands as a global leader in the Global Capability Centres (GCC) sector, a position largely attributed to its exceptional pool of high-quality and cost-effective talent. The nation hosts over 1,800 GCCs established by multinational corporations, predominantly specializing in Information Technology (IT) and IT-enabled services (ITeS). These centres are monumental contributors to the Indian economy, generating a substantial revenue of US$ 68 billion and providing employment to more than 2.16 million individuals. Projections indicate that the GCC market in India is poised to reach an impressive US$ 154-199 billion by 2030, potentially creating jobs for 4 to 5 million people.
The Growth Trajectory and Economic Impact of GCCs
The evolution of GCCs in India over the past two and a half decades has been nothing short of remarkable. From a modest 700 centres employing 400,000 people until 2010, the numbers have surged to 1,800 GCCs with a workforce of 2.16 million by 2025. This growth underscores their pivotal role in driving GDP expansion and fostering employment generation, solidifying their status as integral components of India's economic narrative.
Transfer Pricing Challenges and the Introduction of Safe Harbour Rules
As integral arms of multinational enterprises, GCCs operate under stringent transfer pricing regulations. They primarily deliver services to their overseas parent companies, earning revenue based on an operating cost-plus mark-up model. However, this framework has often led to aggressive audits by transfer pricing authorities, who frequently challenge the cost base or mark-up, resulting in protracted and costly litigation for GCCs.
In a bid to mitigate these disputes and bolster foreign investor confidence, the Indian government introduced the Safe Harbour Rules in 2013. These rules were designed to offer predefined cost bases and pre-agreed mark-ups, along with specific terms and conditions, to ensure transfer pricing compliance. By adhering to these guidelines, GCCs could theoretically secure acceptance of their service revenue from Indian authorities, thereby avoiding lengthy legal battles.
Why the Safe Harbour Rules Have Missed the Mark
Despite periodic revisions, the Safe Harbour Rules have largely failed to achieve their intended objectives. Since their inception, only a handful of GCCs have opted for this mechanism, primarily due to several inherent limitations:
- Restricted Applicability: The rules are currently accessible only to very small companies with a turnover of up to Rs. 300 crore, effectively excluding medium and large-scale enterprises that form the backbone of the GCC sector.
- High Mark-Up Rates: Safe Harbour margins, ranging from 17% to 18% for IT/ITeS and 18% to 24% for Knowledge Process Outsourcing (KPOs), are significantly higher than general industry benchmarks, rendering them commercially unviable for most taxpayers.
- Outdated Eligibility Criteria: The regulations stipulate that the Indian entity must bear insignificant business risk—a condition that no longer aligns with the evolved and complex operational realities of modern GCCs.
These shortcomings have rendered the Safe Harbour Rules increasingly irrelevant, forcing GCCs to endure aggressive tax litigation or seek alternative dispute resolution mechanisms such as Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs). This shift has, in turn, led to a cascading effect, resulting in substantial case pendency and significant delays in resolution.
The Path Forward: Recommendations for Budget 2026
Recognizing these challenges, the Finance Minister announced plans in the Union Budgets of 2024 and 2025 to revamp the Safe Harbour Rules, aiming to make them more attractive and practical for taxpayers. As the government actively works on these revisions, Budget 2026 presents a critical opportunity to implement meaningful reforms. To truly capitalize on the growth momentum of GCCs and provide effective relief, the following measures should be considered:
- Re-evaluate Eligibility Conditions: The criteria for "eligible assessee" must be updated to reflect the current functional profiles of all GCCs, ensuring they are inclusive and relevant.
- De-link Turnover Thresholds: There is no direct correlation between a GCC's functional profile and its turnover. Therefore, Safe Harbour Rules should encompass all GCCs irrespective of turnover, or alternatively, align with the MSME threshold of Rs. 500 crore if targeting small and medium enterprises.
- Align Margins with Industry Benchmarks: Safe Harbour rates must be adjusted to match industry standards, making them commercially viable and competitive.
Enhancing Global Competitiveness
Indian GCCs are increasingly facing stiff competition from countries like Mexico, Brazil, Chile, Argentina, the Philippines, Portugal, Poland, Thailand, and Vietnam in terms of cost competitiveness. By introducing an effective and robust Safe Harbour regime, the Indian government can not only boost foreign investment but also reinforce India's position as an attractive global destination for GCCs. The revised rules, whether notified separately or enacted as part of Union Budget 2026, must address these critical issues to unlock the full potential of this vital sector.
The insights and recommendations presented herein are based on industry analysis and aim to foster a conducive environment for GCC growth in India.
