Legal & Regulatory Compliance to Set Up a GCC in India

GCCs originated in India as GICs for the Indian sectors, mainly to cut costs and provide operational support to foreign service offerings. In due course, GCCs have grown from simple back-office operations and cost-arbitrage centers to centers of excellence that drive technological transformation. With a talent pool and decent operational costs, India is turning out to be the favorite destination for GCCs.

Today, India hosts about 1700 GCCs, employing 1.66 million people; this number will grow rapidly as foreign entities continue to probe India’s talent and operational landscape. GCCs in India are playing a role far beyond providing support functions to their potential technological headquarters for global entities, affording a platform to drive and test transformation initiatives.

The GCC ecosystem in India has become a critical building block for any foreign entity desiring to innovate and grow. These centers have turned sandboxes for developing, testing, and implementing organization-wide transformation initiatives, attesting their value beyond mere cost savings

Key Legal and Regulatory Considerations to Setup or Operate a GCC in India

Setting up a GCC in India is labyrinthine, where the foreign entity has to wade through central regulations to state-specific regulations. Compliance spans various aspects, ranging from corporate law, contract law, and tax law to understanding how different jurisdictions approach issues such as permanent establishment, reporting structures, data privacy, and labor laws. A few critical legal considerations for setting up and operating the GCC facility in India are given below:

Corporate Structuring – How to Set Up and Commercial Law

The process of a foreign entity establishing a GCC in India commences with the selection of the legal form. It can be a company, a joint-venture company, an office, a partnership, or a limited liability partnership (LLP). The corporate structure will determine the degree of control and ownership, the foreign entity wants to retain. The two common models are:

• A traditional “do-it-yourself” model (DIY Model), this one operates independently where a foreign entity sets up the GCC himself, keeping total control and ownership, but he can outsource particular tasks to local advisors.
• The build-operate-transfer (BOT) model, where a third-party provider comes in the operational and to some extent of setting up GCC and then gradually gives the control, and ownership to a foreign entity.

The type of compliance requirement for initiating a GCC and for its operational activities will vary among the chosen corporate structures. For example, in the case of a GCC, which is a company incorporated under the Companies Act, 2013, it is required to comply with the rules and regulations concerning the structure of the board of directors, duties of the directors, company policies, and routine reporting among other requirements.

Determination of Strategic Location – Where to Establish

Though there is no specific overarching legislation governing GCCs, special economic zones and International Financial Services Centres provide the requisite framework for foreign entities to establish operations. In this regard, the Special Economic Zones are governed by the Special Economic Zones Act, 2005 whereas the International Financial Services Centres are governed under the International Financial Services Centres Authority.

These are in the form of tax exemptions, labor law relaxations, and simplified licensing. Some top destinations to set up GCCs are Bengaluru, Gurugram, Hyderabad, Mumbai, Delhi-NCR, and GIFT City. These offer a deep pool of talent, robust infrastructure, and opportunities for regulatory relaxation.

Workforce Strategy and Sourcing

Indian labor laws govern all employees of a GCC, whether Indian or foreign nationals. Some key labor laws include the Minimum Wages Act, 1948 and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In addition, a GCC will have to follow all employment laws relating to social security, health insurance, and working conditions.

Apart from that, foreign entities have to be updated on the legislations pertaining to the hiring of foreign nationals in India, which have additional compliances. Again, recruitment and retention of talent are key factors relating to the success of a GCC, keeping in mind the highly qualified and cost-effective manpower in this country.

Intellectual Property, Data, and Technology

A leading role of GCCs is to render services to the parent entities located abroad, and this often involves IP and data transfer. Indian IP and data protection laws, along with those of the home country of the foreign entity involved in the transaction, should be followed, such as:

• Technology and IP licensing arrangements.
• Comply with the transfer of data across borders in view of the new Digital Personal Data Protection Act 2023 which is going to bring in strict regulations concerning data storage, transfers, and protection.

These laws become very crucial for the smooth running of the GCC and also to secure the intellectual assets of a parent entity.

Taxation

India has a pretty elaborate system of taxation, and one major issue GCCs have to adequately pay attention to is transfer pricing and compliance with GST. The foreign entities also have to take into consideration the complexities of India’s Permanent Establishment rules to avoid their operations being held as a permanent establishment; such a conclusion would create further tax liabilities.

Also, tax planning regarding employee incentives, property taxes, and capital gains needs to be cautiously considered while setting up and operating the GCC.

Bracing for Regulatory Overhaul

The regulatory landscape in India keeps on changing, and foreign entities need to be ready for future changes. Some key developments slated for 2024:

• The introduction of the Digital India Bill and Telecommunications Bill will change the way data protection and digital operations take place.
• Namely, unifying and simplifying the country’s complicated labor laws by enacting four new labor codes.
• Replacement of the SEZ Act with the DESH Bill, which may affect GCCs operating their units in SEZs.

These changes again underline the need for ongoing compliance and legal monitoring in setting up and operating a GCC in India.

The Importance of Company Formation in India

Company formation in India follows a rigorous process, guided by the Companies Act, 2013. Essential steps include:

1. Reserve the company name through the Reserve Unique Name (RUN) service.
2. Filing the SPICe+ form, which includes the Memorandum of Association (MOA) and Articles of Association (AOA).
3. Obtaining a Director Identification Number (DIN) and Digital Signature Certificate (DSC).
4. Applying for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).

Foreign entities must also determine the most appropriate legal structure, whether it be a private limited company, a public limited company, or a branch or liaison office. Foreign direct investment (FDI) regulations, governed by the Foreign Exchange Management Act (FEMA), 1999, also play a significant role in determining how foreign companies can invest in India.

Taxation and Compliance with Labour Laws

The tax regime in India, as contained in the Income Tax Act 1961, covers domestic and foreign companies, with transfer pricing regulations in place concerning dealing with associated enterprises. Further, under the GST regime, the registration would be compulsive for an entity crossing the specified threshold of turnover.

Equally important is adherence to labor laws. The Industrial Disputes Act, 1947, controls industrial relations, while the Shops and Establishments Act controls working conditions in respect of the state. Some main Acts pertaining to employment are the Minimum Wages Act, 1948, and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

Intellectual Property, Data Protection, and Technology

Intellectual property protection is one of the very important aspects of GCCs. The key legislations include the Patents Act, 1970, relating to the filing of patents, and the Trademarks Act, 1999, dealing with the registration of trademarks. The Information Technology Act, 2000, covers data privacy and protection, while the newly enacted Digital Personal Data Protection Act, 2023, lays down comprehensive regulations on data protection and privacy.

Technology transfer agreements arising between entities for businesses sharing technology are under the ambit of another equally important legal framework: the Indian Contract Act, 1872.

Conclusion

India’s skilled and affordable human capital has solidified its reputation as a prime destination for foreign entities looking to establish GCCs. Besides providing operational support, GCCs in India have transformed into centers of technological innovation and excellence. The Indian government continues to drive reforms that encourage foreign investment and business expansion, reinforcing India’s standing as a hub for GCCs.

Key Points to Remember:

1. Company Formation: Compliance with the Companies Act, 2013, is essential for setting up any company in India, requiring steps such as obtaining a DIN, DSC, PAN, and TAN.
2. FDI: India’s FDI policy allows 100% FDI in certain sectors under the automatic route, while others require approval.
3. Taxation: Transfer pricing regulations, GST compliance, and tax incentives for specific activities are important considerations for GCCs.
4. Labor Laws: Compliance with Indian labor laws is crucial, including laws related to minimum wages, provident funds, and social security.
5. Intellectual Property: Protecting IP through the Patents Act, Trademarks Act, and Copyright Act is vital for success.
6. Data Protection: Compliance with the Digital Personal Data Protection Act, 2023, and the IT Act is critical for GCCs.
7. Strategic Locations: Cities like Bengaluru, Hyderabad, and GIFT City are popular for setting up GCCs due to access to talent and regulatory benefits.
8. Regulatory Changes: Be prepared for regulatory changes such as the DESH Bill and new labor codes that may impact future operations.