Creating an India GCC as your own subsidiary

Setting up a Global Capability Center (GCC) in India using your own subsidiary can be an exciting yet complex process. This approach provides your company with a direct presence in India, potentially enhancing your brand's visibility and making it easier to manage and engage with local employees. However, establishing and running a subsidiary in India comes with its own set of challenges, compliance requirements, and long-term commitments.

In this blog, we will explore the pros and cons of setting up an India-based GCC as your own subsidiary, and discuss the key considerations you need to keep in mind before taking this step.

1. Understanding Indian Laws and Compliance

The Legal Landscape

The first step to setting up a subsidiary in India is having a thorough understanding of Indian laws and regulations. India’s legal framework for foreign companies is quite specific and involves several steps, including registering the company, complying with tax laws, and adhering to local labor regulations.

Key Compliance Areas:

• Corporate law: You’ll need to choose the right type of company (private limited, public limited, etc.) and ensure that it complies with the Companies Act.
• Taxation: You must understand both direct taxes (corporate income tax, GST) and indirect taxes (service tax, VAT) that apply to foreign subsidiaries.
• Labor laws: From employee benefits to contract stipulations, labor laws in India are strict, and your company will be responsible for managing HR compliances such as PF (Provident Fund), ESI (Employee State Insurance), and more.
• Foreign Exchange Management Act (FEMA): This governs foreign investments in India and must be considered when bringing in capital from outside India.

Having a detailed understanding of these laws ensures that you avoid potential compliance pitfalls that can delay your expansion plans or create legal complications.

2. The Time Factor: Setup Takes Time

The Long Setup Timeline

Setting up a subsidiary in India is not an overnight process. On average, it takes 6 to 18 months to fully establish a subsidiary, depending on factors like:

• The efficiency of your partner (legal or financial) who handles the setup process.
• The complexity of your company structure.
• The time it takes to obtain necessary approvals, such as FEMA or RBI clearances (if applicable).

This means that the first employee you want to onboard could be 6 to 18 months away, making it a longer and more resource-intensive process compared to other options like using an Employer of Record (EoR).

Strategic Planning for Delays

Understanding the time commitments involved will help you set realistic expectations for your hiring and expansion timelines. If you plan to onboard employees earlier, it may make sense to look into interim options such as hiring through an EoR while setting up the subsidiary.

3. Transfer Pricing and Financial Considerations

Ensuring Financial Compliance

As your subsidiary will function as a cost center, you will need to comply with transfer pricing regulations. Transfer pricing ensures that any intercompany transactions between your subsidiary in India and the parent company are priced fairly and in accordance with international tax regulations. This can be particularly important if you’re handling intellectual property or providing services between the entities.

Key Points to Keep in Mind:

• Transfer pricing documentation: You will need to maintain detailed documentation to justify the pricing of services or goods exchanged between the parent company and the subsidiary.
• Tax implications: Transfer pricing issues can lead to audits and potential penalties, so it’s essential to keep a close eye on pricing structures.

Higher Running Costs

While the subsidiary will provide a greater degree of control and visibility, it also brings higher operational costs. This includes:

• Employee salaries and benefits: Setting up payroll and benefits structures in India can be expensive, especially if you’re offering competitive salaries to attract top talent.
• Office space and overheads: Depending on where you choose to establish your office (major cities like Bengaluru, Mumbai, or Delhi), rent and utilities can add up.
• Taxes: A subsidiary is subject to corporate income tax in India, which can be higher than in some other jurisdictions, along with other taxes that could affect profitability.

4. Exit Strategy Challenges

The Long Road to Exit

One of the most critical things to consider when setting up an India subsidiary is the exit process. If your company ever decides to close operations or sell the subsidiary, the process can be time-consuming and complicated. It typically takes anywhere between 12 to 60 months to fully unwind operations and exit the Indian market.

Exit-related Considerations:

• Legal processes: Closing a subsidiary involves a lot of paperwork, including deregistering with the Ministry of Corporate Affairs and settling any outstanding tax liabilities.
• Tax implications: You may face taxes related to the sale or transfer of assets, and it could take a while to recover the capital investment made in setting up the subsidiary.

Given these complexities, it's crucial to factor in the long-term commitment involved in operating a subsidiary and to have an exit strategy in place right from the beginning.

5. Advantages of Having an India Subsidiary

Direct Presence and Brand Recognition

There are some clear advantages to setting up a subsidiary in India:

• Brand visibility: Your company will have a physical presence, which can be appealing to employees and customers alike. It helps establish trust and creates better local engagement opportunities.
• Talent pool: By hiring locally, you can tap into India’s vast and diverse talent pool, especially in fields like technology, engineering, finance, and customer support.
• Control over operations: A subsidiary allows you to have full control over your operations, ensuring that your company culture, processes, and vision are fully implemented without external interference.

Easier Employee Engagement

Having an India-based subsidiary allows you to build a team that is closely aligned with the company’s mission and values. Employees will feel more connected to the company, knowing that they are part of a fully integrated global organization with local presence.

Conclusion

Setting up a Global Capability Center (GCC) as a subsidiary in India comes with its share of benefits and challenges. While it offers control, brand presence, and employee engagement, it also involves navigating complex legal frameworks, long setup timelines, high operational costs, and compliance hurdles.

Before proceeding with this route, it's crucial to carefully consider the associated time, financial resources, and ongoing management requirements. With the right strategy and partner, an India-based subsidiary can become a valuable extension of your business operations, driving growth and creating new opportunities in one of the world’s most dynamic markets.

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