Employment Structuring in Global Capability Centers (GCCs) in India: Legal, Regulatory, and Tax Considerations

India has evolved into a premier destination for Global Capability Centers (GCCs)—dedicated offshore units established by multinational companies (MNCs) to handle a wide array of functions including IT, finance, R&D, legal, and analytics. A critical component in the setup and operation of a GCC is the employment structure, which impacts legal compliance, tax exposure, and operational effectiveness.

This article outlines key legal, regulatory, and tax considerations in structuring employment in Indian GCCs, including scenarios where a third-party service provider sets up and operates the GCC on behalf of a foreign parent.

1. Employment Models in GCCs: Under Whose Rolls Are Employees Hired?

(a) Direct Employment by the Indian Entity

In the standard GCC model, the foreign parent incorporates an Indian subsidiary (typically a Private Limited Company). Employees are placed on the rolls of the Indian entity, which assumes full legal responsibility as the employer. This model enables:

• Direct control over hiring, payroll, and internal policies
• Clear compliance with Indian labor laws
• Transparent employer-employee relationship

(b) Employment Through a Third-Party Staffing Provider

GCCs may outsource staffing needs to manpower supply or staffing agencies. The employees are legally on the rolls of the agency, but work under the control and supervision of the GCC. Key implications include:

• The Contract Labour (Regulation and Abolition) Act, 1970 becomes applicable
• The GCC is treated as the principal employer, liable for compliance alongside the agency
• Labour inspector scrutiny may arise around control, supervision, and employment terms

(c) Employer of Record (EOR) or PEO Model

In early or exploratory stages, GCCs may use an Employer of Record (EOR) to legally employ individuals in India. This model allows quick market entry but:

• Is not ideal for long-term headcount growth
• Limits direct HR control
• Could trigger PE risk if the EOR acts as an agent of the foreign entity

2. Third-Party Operated GCCs: Labour and Employment Considerations

Scenario:

A third-party service provider or India-based partner sets up and runs the GCC on behalf of a foreign company, often under a Build-Operate-Transfer (BOT), captive operations, or outsourced operations model.

Employment Structuring Options:

(a) Employees on the Rolls of the Third-Party

• The third-party sets up a legal entity and employs talent on its own rolls
• This arrangement is not a legal employer-employee relationship with the foreign company
• The foreign entity pays for services under a contract (outsourcing, BOT, etc.)

Legal Consequences:

• Indian entity is the legal employer and assumes all labour law obligations
• Foreign company does not have direct employer liability
• Possibility of misclassification, co-employment risk, or sham contract scrutiny if foreign entity exercises significant control over employees

(b) Staffing on Behalf of the Foreign Entity (White Label)

• Third-party uses its own entity to hire but operates under the foreign brand
• Labour courts may look through the structure to determine “real” control and supervision
• If control lies with the foreign entity, courts may treat it as the actual employer — especially in disputes or claims

(c) Transfer of Employees Upon “Transfer” Phase

• In BOT models, employees initially hired by the Indian service provider are transferred to the newly incorporated foreign-owned Indian entity
• This requires:
  • Transfer of Employment Agreements with employee consent
  • Preservation of continuity of service (for gratuity, leave, etc.)
  • Compliance with retrenchment or closure laws if structure changes significantly

3. Labour Law Compliance Requirements

Regardless of the employment model, the following statutory laws must be complied with:

Contract Labour Regulation:

If the third party is acting as a staffing agency or vendor, it must obtain a license under the Contract Labour (Regulation and Abolition) Act

• The foreign company, as the principal employer, must ensure the vendor’s license and registration are valid

4. Tax and Transfer Pricing Implications

(a) Payroll-Related Tax Compliance

• TDS under Section 192 must be deducted and deposited monthly
• Quarterly returns and annual Form 16 issuance required
• Professional tax may apply (state-specific)

(b) Transfer Pricing

• Any intercompany arrangement involving employee costs, services, or infrastructure must adhere to arm’s length pricing
• Transfer pricing documentation and Form 3CEB filing is mandatory

(c) Permanent Establishment (PE) Exposure

• If the foreign entity exercises substantial control over hiring, day-to-day operations, or supervision, it could constitute a Dependent Agent PE
• Especially relevant in third-party operated GCCs where the foreign company manages business-critical activities or decision-making from India

5. Do GCCs or Their Service Providers Need a Recruitment License?

No Recruitment License Required When:

• Hiring employees directly for in-house roles
• No recruitment or placement for third parties

License Required When:

• Providing recruitment services to external clients
• Hiring for overseas placement (under the Emigration Act, 1983)
• Engaging in contract staffing or manpower supply (CLRA license required)

6. Foreign Nationals and Remote Work

• Employment visas are mandatory; with minimum salary thresholds
• GCCs must register foreign nationals with FRRO/FRO
• Remote work policies must align with state-specific rules (e.g., Karnataka, Maharashtra IT/ITES exemptions)

Conclusion

Whether a GCC is set up directly by a foreign parent or through a third-party service provider, the employment structure must align with Indian labour, tax, and regulatory laws. Special care is needed in BOT or outsourcing models to:

• Clearly define legal employer obligations
• Avoid co-employment or PE risks
• Ensure seamless transfer of employees upon GCC transition

As India becomes a strategic global delivery location, employment structuring will be a key pillar in ensuring compliant, tax-efficient, and sustainable GCC operations.

Contributed by – Jidesh Kumar