Transfer pricing, PE exposure and GST on exports set a captive’s tax cost
A captive centre’s tax position turns on six points. The first three concern how the parent pays the centre; the others concern PE risk, GST on the services it exports, and the separate regime for group finance centres in GIFT IFSC.
| Topic | What the sources say | Basis |
|---|---|---|
| Cost-plus pricing and the safe harbour | Captives are usually paid cost plus a margin by the parent. Budget 2026-27 merged IT services into one safe-harbour category at a 15.5% margin, raised eligibility from ₹300 crore to ₹2,000 crore and allowed a five-year election. | Budget Speech 2026-27; Memorandum to Finance Bill 2026 |
| Advance pricing agreements | Larger centres or unusual functions may prefer a unilateral APA. The Budget proposes to fast-track IT-services APAs and endeavour to conclude them within two years. | Budget Speech 2026-27 |
| Transfer-pricing documentation | The Finance Act 2026 replaced the penalty for not furnishing the transfer-pricing accountant’s report (s.172) with a fee (s.428); the report itself is still required. | Finance Act 2026; Memorandum to Finance Bill 2026 |
| Permanent establishment and secondment | In Hyatt International (25 July 2025) the Supreme Court found a fixed place PE under Article 5(1) of the treaty where the foreign group controlled Indian operations. Parent staff who direct the captive’s work need careful structuring. | EY alert on Hyatt International, Jul 2025 (secondary) |
| GST on services exported to the parent | The Finance Act 2026 (s.157) removed the special rule for intermediary services from the IGST Act, so they follow the general place-of-supply rule and can qualify as exports. | Finance Act 2026 |
| GIFT IFSC for group finance centres | IFSC units get a 100% deduction for 20 consecutive years out of 25 (s.147). IFSCA approved the Global In-House Centre Regulations, 2025 on 22 December 2025 for group finance and operations units. | Income-tax Act 2025; IFSCA press release, 23 Dec 2025 |
Choosing between the safe harbour and an APA
The 15.5% safe harbour is approved through an automated process and, once chosen, can run for five years, for taxpayers with operating revenue up to ₹2,000 crore. It covers software development, ITeS, KPO and contract R&D. It suits routine cost-plus centres; a centre doing higher-value R&D or AI work may face a claim for a higher margin, which is why the sources suggest benchmarking annually or seeking an APA. Scheme status is on the central incentives page and the method detail on transfer pricing and GCC tax and transfer pricing.
PE after Hyatt
The Hyatt ruling looked at control in practice. Where parent-company staff direct the captive’s day-to-day work, or secondees take decisions for the group in India, the foreign parent risks a fixed place PE. Keep decision rights and secondee roles documented, and align the inter-company agreement with what actually happens.
GIFT IFSC
A group finance or operations unit can sit in GIFT IFSC under the IFSCA GIC Regulations, 2025 and claim the s.147 deduction. Budget 2026-27 proposed a 15% rate on IFSC business income after the holiday; it is not in the Finance Act 2026. Confirm that the planned activity qualifies before relying on it.
STPI and SEZ units
Registering as an STPI or SEZ unit is optional for a services centre. Several state GCC policies tie stamp duty relief to IT parks, SEZs and STPIs, so the choice belongs with the office decision; see state incentives.
Corporate tax at a glance
Rates for tax year 2026-27, the first year under the Income-tax Act 2025, which replaced the 1961 Act from 1 April 2026. Effective rates add surcharge and the 4% health and education cess. Treaty rates can be lower where treaty conditions are met. Effective rate = base rate × (1 + surcharge) × 1.04.
| Tax | Rate or rule | Note |
|---|---|---|
| Corporate tax: concessional regime (s.200) | 22% + 10% surcharge + 4% cess = 25.168% effective, whatever the level of income | Optional for any Indian company, including a foreign-owned subsidiary. Most deductions and exemptions are given up; MAT does not apply. |
| Corporate tax: normal regime | 30%, or 25% if turnover in FY2024-25 was up to ₹400 crore. Surcharge 7% on income above ₹1 crore, 12% above ₹10 crore; 4% cess | Top effective rate 34.944% (30% band). Deductions and incentives remain available, but MAT applies. |
| Foreign company: branch or permanent establishment | 35% on income other than special-rate income. Surcharge 2% on income above ₹1 crore, 5% above ₹10 crore; 4% cess | Effective 36.40% (income up to ₹1 crore), 37.128% (₹1–10 crore), 38.22% (above ₹10 crore). |
| Minimum alternate tax (MAT, s.206) | 14% of book profit (was 15%) from tax year 2026-27; a final tax for companies in the old regime, with no new MAT credit | Credit built up to 31 March 2026 is usable only after moving to the new regime, up to 25% of the year’s tax (domestic companies). |
| 15% regime for new manufacturing companies (s.201) | Closed to new entrants: only companies that began manufacturing or production by 31 March 2024 qualify | Budget 2026-27 left corporate tax rates unchanged (only the MAT rate was cut) and added no replacement regime; new manufacturers compare s.200 with the normal regime. |
| Dividends paid to a non-resident parent | 20% withholding under domestic law, plus surcharge and cess | Taxed in the shareholder’s hands. Treaties can reduce withholding on dividends, interest, royalties and technical fees, subject to treaty conditions. |
The gap between the subsidiary rate (25.168%) and the branch or PE rate (36.40–38.22%) is one reason captives are usually run as wholly owned companies, and why an unintended PE of the parent is costly.
Withholding, capital gains, buy-backs, GST and transfer pricing
Domestic-law rates for tax year 2026-27, before surcharge and cess unless stated. The applicable treaty may reduce withholding where its conditions are met.
| Tax | Rate or rule | Note |
|---|---|---|
| Royalties and fees for technical services | 20% on payments to a foreign company, plus surcharge and cess | A lower treaty rate may apply, subject to treaty conditions. |
| Capital gains of non-residents: listed shares | Short-term (s.196): 20%. Long-term (s.198): 12.5% on gains above ₹1.25 lakh | Plus surcharge and cess. Treaty exemptions are open to challenge under GAAR (Tiger Global, January 2026). |
| Capital gains of non-residents: unlisted shares | Long-term: 12.5%. Short-term: at the rate for other income, 35% for a foreign company | Plus surcharge and cess; treaty relief subject to treaty conditions. |
| Share buy-backs | Taxed as capital gains in the shareholder’s hands from 1 April 2026, no longer as dividend | Promoters pay an additional tax on buy-backs under s.68 of the Companies Act 2013. It takes long-term gains, and short-term gains on listed shares, to 22% where the promoter is an Indian company and 30% for any other promoter, including a foreign parent (before surcharge and cess). |
| GST (from 22 September 2025) | Two main rates, 5% (merit) and 18% (standard), plus 40% for a select few goods and services | Approved by the 56th GST Council on 3 September 2025. Tobacco products were initially kept on earlier rates and compensation cess. |
| Transfer-pricing safe harbour: IT services | 15.5% operating margin on cost for software, ITeS, KPO and contract R&D, for taxpayers within the ₹2,000 crore eligibility threshold (raised from ₹300 crore) | Budget 2026-27; notified with the 2026 rules. Approval is automated and the option can run for five years. |
The Tiger Global decision (Supreme Court, January 2026) denied India–Mauritius treaty benefit and rejected grandfathering protection under GAAR, per the KPMG and Khaitan & Co notes listed under sources.
For the cross-sector treatment see corporate tax, withholding and capital gains, GST and customs and transfer pricing.
What to check next
- Test the centre’s operating revenue against the ₹2,000 crore threshold and decide whether the 15.5% safe harbour fits its functions, or whether an APA is safer.
- Map who directs the captive’s work and document decision rights and secondee roles in light of Hyatt.
- Confirm that services billed to the parent qualify as exports for GST under the general place-of-supply rule.
- Choose between the s.200 concessional regime and the normal regime before the first return.
- For a group finance unit, confirm IFSCA GIC eligibility and the s.147 deduction before choosing GIFT IFSC.