Will India’s Permanent Establishment Tax Disrupt the Global Business Service Landscape? | Blog

As India’s prominence in Global Business Service (GBS) grows, staying updated on tax laws and adapting agile strategies is essential for multinational corporations to achieve sustainable growth amid evolving global business dynamics. In this blog, we delve into the impact of the Permanent Establishment (PE) tax within the realm of GBS.

As global corporations continue to increase their reliance on the GBS model, taxation policies will also continue to play a crucial role in shaping the strategies and operations of these corporations. One such policy that holds significant importance, especially in the context of India, is the concept of the permanent establishment tax. As India continues to assert itself as a key player in the global economy, understanding the implications of PE tax becomes imperative for global corporations operating within its jurisdiction.

Understanding permanent establishment tax:

Permanent establishment refers to a fixed place of business through which an enterprise carries out its business activities, either wholly or partially. The concept is pivotal in international taxation as it determines the jurisdiction’s right to tax business profits earned within its territory by foreign enterprises. In India, the concept of PE is governed by both domestic laws and Double Taxation Avoidance Agreements (DTAA) with various countries. For example, if a foreign company expands its operations within India, the income derived from such activities becomes taxable in India.

Article 7 of the UN Model empowers the source state, like India, for instance, to levy taxes on profits linked to a PE within its borders. A PE, as outlined in Article 5(1) and mentioned above, denotes a fixed place of business where the enterprise conducts its activities, either wholly or partially. This principle hinges on some key factors, such as the existence of a physical business location, the right to use it, and the engagement in business activities therein. Each criterion holds its specific benchmarks for validation.

Additionally, supplementary articles clarify concepts like the definition of a “fixed place of business,” the concept of a supervisory PE, and exclusions from the PE definition. When tax authorities evaluate the presence of a PE, they undertake a comprehensive analysis. This analysis involves reviewing actual operations, legal frameworks, and judicial precedents. Various elements undergo scrutiny, including business models, transactions, strategies, human resources, physical offices, and warranties. This exhaustive analysis aims to establish whether the criteria defining a permanent establishment are met, ensuring compliance within the international taxation framework, and avoiding tax evasion or avoidance.

Potential impact on the GBS market:

GBS encompass a wide array of activities, including IT services, back-office operations, finance and accounting, HR services, and more. Many multinational corporations leverage India’s skilled workforce and favorable business environment to establish their GBS centers in the country. However, discussions surrounding PE taxation have prompted GBS leaders to assess its potential impact on their operations in India. Here are some key considerations:

  • Taxation on business profits: Establishing a PE in India subjects the foreign enterprise to taxation on the profits attributable to the Indian operations. This can significantly impact the overall tax liability of the corporation, requiring meticulous tax planning to optimize the tax structure while ensuring compliance with Indian tax laws
  • Transfer pricing regulations: GBS centers often engage in intra-group transactions, such as the provision of services to affiliated entities. Indian transfer pricing regulations mandate that such transactions be conducted at arm’s length prices to prevent profit shifting. Non-compliance can lead to tax disputes and penalties, further underscoring the importance of robust transfer pricing documentation
  • Compliance burden: Operating through a PE entails compliance with Indian tax laws, including filing tax returns, maintaining books of accounts, and adhering to reporting requirements. Ensuring compliance can be resource-intensive, necessitating efficient tax management systems and expertise in Indian tax regulations
  • Strategic considerations: The implications of PE tax influence strategic decisions regarding the structure and location of GBS. Enterprises must weigh the tax implications against other factors, such as talent availability, cost-effectiveness, and regulatory environment, to optimize their global business operations

Voice of India GBS leaders

Based on our conversation with the India GBS head across different industry verticals, we understand that while PE remains a topic of interest, the issue of PE tax is not a primary concern among GBS leaders presently. Here’s why:

  1. a) Place of effective management: Currently, the criteria for a foreign company to be deemed a resident in India is if its control and management are wholly situated in India. However, GBS leaders highlight that the control and management of most processes still reside with global process and business owners located in onshore markets, not India. Consequently, the India center cannot be classified as the “place of effective management,” and thus, PE implications should not apply
  2. b) Significance of business operations and revenue: While GBS leaders acknowledge the maturity and integral role of India centers in enterprise operations, they emphasize that revenue-generating activities primarily occur within onshore entities. Hence, their argument leans toward the idea that taxation should only be done in onshore markets. However, there is acknowledgment, particularly in the pharmaceutical and life sciences verticals, that India conducts substantial R&D work, which often leads to revenue generation for the enterprise. Consequently, GBS leaders recognize that India centers, especially those engaged in R&D, may potentially be subject to PE taxation


As India continues to bolster its position as a hub for GBS, understanding and effectively managing the implications of permanent establishment tax is paramount for multinational corporations. By adopting proactive tax planning strategies, ensuring compliance with regulatory requirements, and leveraging available tax treaties, businesses can navigate the complexities of PE tax while capitalizing on the vast opportunities offered by the Indian market.

Given the significant role PE plays as a contentious issue in international tax frameworks, it is imperative for foreign enterprises to proactively engage with India’s domestic taxation regulations and seek local expertise for compliance. GBS leaders should collaborate with various stakeholders, such as India and global legal teams, taxation experts, and finance teams, to assess and mitigate the risks associated with PE for their India operations.

In the dynamic landscape of global business, staying abreast of evolving tax regulations and employing agile strategies are essential for sustainable growth and success. As India’s economy integrates further into the global marketplace, the significance of permanent establishment tax in shaping international business dynamics is poised to grow, emphasizing the need for businesses to adapt and thrive in this evolving tax environment.

Watch our Conversations with Leaders sessions to hear from GBS industry leaders. In episode 10, they’ll discuss ways to develop powerful GBS execution strategies to successfully blend GBS and enterprise efforts.

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