India now hosts over 1,700 global capability centres — captive delivery hubs run by multinationals for engineering, R&D, testing and technical work. Yet a quirk in the place-of-supply rules means some of their most valuable output is taxed as if it were consumed in India. A proposal expected at the GST Council's 7 October meeting could finally correct that.

Government sources indicate the Council may amend the IGST Act to treat qualifying GCC services rendered to overseas group entities as exports, lifting the 18% GST currently charged on them. The change would need a legislative amendment to the IGST Act, so it wouldn't be instant — but the direction of travel is clear.

The problem: the place-of-supply trap

Under Section 13(3)(a) of the IGST Act, when a service requires goods to be made physically available to the supplier, the place of supply is where the service is actually performed. For a GCC, that's India.

So when an Indian centre tests, validates or runs R&D on a physical prototype — a chip, a board, a piece of hardware — shipped in by its overseas parent, the law deems the supply to happen in India. It doesn't matter that the customer, the contract and the commercial benefit all sit abroad, or that the money arrives in foreign exchange. The supply fails the "export" test, and 18% GST lands on it.

What the fix actually does

Treating these services as exports brings them within the zero-rated regime under the IGST Act. In practice that means two things:

• No 18% on the outward supply. The tax currently padding the cost of the service simply comes off.
• Refund of input tax credit. The GST already paid on inputs — software, equipment, facility costs — used to deliver the service becomes claimable as a refund, releasing working capital.

As a senior government official put it to the press, the credit that has gone into providing the service becomes eligible for refund, and the provider stops paying GST on the outward supply — removing an 18% cost that shouldn't have been there in the first place.

Who stands to gain the most

The relief matters most for GCCs doing high-value, hardware-adjacent work for overseas group entities — exactly the activities that get caught by the "goods made available" wording:

• Semiconductor & SoC design. Centres testing and validating chips and physical hardware prototypes.
• Engineering & R&D. Product validation, engineering diagnostics and development-build activities.
• Testing & technical support. Facilities running tests on physical components sent by the parent.

Deloitte's Mahesh Jaising has noted that even where the recipient, the contracting customer and the commercial benefit all sit outside India, these services get disputed on whether they qualify as exports — leaving GCCs facing 18% GST and an artificial cost disadvantage against delivery centres in other countries. A clear amendment, he suggests, would also cut the uncertainty around how such services are taxed.

— as reported in press commentary on the proposal

Why it matters beyond the tax line

This is fundamentally about competitiveness. Service exports have become one of India's strongest external-sector stories, and GCCs are a big part of that engine. An 18% tax that rival delivery hubs abroad don't carry is a self-inflicted handicap. Removing it does two useful things at once: it improves India's pricing against other jurisdictions, and it ends a long-running class of classification disputes that has tied up both taxpayers and the department.

Disclaimer: This article covers a proposed change that has not yet been enacted, and is current as at the date of publication. It is general information, not legal or tax advice, and should not be relied on for any specific transaction. The scope, conditions and effective date of any amendment will depend on the final law. Please consult a qualified professional — talk to efiletax — before acting.