Key points
- A proposed 25% tax on US firms using foreign outsourcing could significantly impact India’s $283 billion IT sector.
- The HIRE Act, while unlikely to pass in its current form, is causing uncertainty and contract renegotiations.
- Clients are delaying IT spending and contract signings due to the regulatory risk.
- The bill could lead to legal challenges and intense lobbying efforts from affected US companies.
India’s massive IT sector, a cornerstone of its economy, is facing a period of significant uncertainty due to a proposed US tax bill. The HIRE Act, introduced by Senator Bernie Moreno, suggests a 25% tax on American companies utilizing foreign outsourcing services.
Although the bill’s passage is uncertain in its current form, the mere proposal has already triggered a wave of contract renegotiations and delays among major US clients of Indian IT firms. This uncertainty is particularly damaging for India’s IT sector, which is already grappling with weak revenue growth in the US market due to inflationary pressures and economic slowdown.
The potential impact extends beyond immediate contract delays. Experts predict that even a diluted version of the bill could substantially alter the economics of outsourcing, potentially increasing the tax burden on outsourced payments to as much as 60% when combined federal, state, and local taxes are considered.
This significant cost increase would diminish the competitiveness of US firms relying on overseas IT services, setting the stage for protracted legal battles and lobbying efforts. Companies like Apple, American Express, and Cisco, which are major clients of Indian IT firms, are expected to push back vigorously against this legislation.
The proposed legislation also casts a shadow over the growth of US firms’ Global Capability Centres (GCCs) in India. These centers, initially established for cost-effective operations, have evolved into high-value innovation hubs contributing significantly to research and development.
While existing projects may continue, future expansion and new setups could face significant hurdles due to the increased tax burden, which impacts cost arbitrage—a crucial decision factor in establishing these GCCs. The current shortage of skilled IT workers in the US, however, could mitigate the immediate impact of the bill.
Despite the uncertainty, legal experts predict a strong backlash if the bill passes. US companies heavily reliant on outsourcing are likely to challenge the legislation in court. The outcome remains unclear, with the possibility of a significantly watered-down version or delayed enforcement.
The situation underscores the complex interplay between global trade, taxation, and the IT sector, highlighting the precarious balance between cost advantages and national economic interests.
