INDIA’s IT sector is facing uncertainty as US lawmakers consider a 25 per cent tax on companies using foreign outsourcing services.
Analysts and lawyers said the proposal has led to customers delaying or re-negotiating contracts, raising concerns in India, the world’s largest outsourcing hub.
They said the bill is unlikely to pass in its current form but could trigger long-term changes in how American firms purchase IT services. Companies heavily dependent on outsourcing are expected to resist the move, setting up lobbying and possible legal battles.
India’s $283 billion IT industry, which contributes more than 7 per cent to the country’s GDP, has for over three decades provided services to major clients including Apple, American Express, Cisco, Citigroup, FedEx and Home Depot. The industry has also faced criticism abroad over jobs shifting to India.
Last week, Republican Senator Bernie Moreno introduced the HIRE Act, which proposes taxing companies that hire foreign workers instead of Americans. The bill also aims to prevent firms from claiming outsourcing expenses as tax-deductible, with the revenue directed toward US workforce development.
The proposal comes at a difficult time for Indian IT, which is already seeing weak revenue growth in its key US market as clients cut non-essential spending due to inflation and tariff concerns.
“The HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts,” said Jignesh Thakkar, EY India’s compliance head.
In some cases, combined federal, state and local taxes could raise the levy on outsourced payments to as much as 60 per cent, Thakkar added.
“While its partisan proposal may seem initially attractive, it’s ultimately an artificial cost which makes organisations less competitive and profitable globally,” said Arun Prabhu, partner at Cyril Amarchand Mangaldas.
The idea has been gaining traction. This month, White House trade adviser Peter Navarro reposted a call from far-right activist Jack Posobiec for tariffs on services as well as goods.
“When political noise turns into regulatory risk, clients quickly insert contingencies, reopen pricing and demand delivery flexibility,” said Saurabh Gupta, President of HFS Research.
“Clients will simply take longer to sign, longer to renew, and longer to commit transformation dollars,” Gupta said.
Backlash expected
Industry watchers said US firms are likely to push back strongly against the bill and challenge it legally if it is enacted.
“A bill like this would probably face a lot of backlash from US companies that rely heavily on outsourcing, who would likely bring litigation to challenge various aspects of the bill, if it were ever to be passed into law,” said Sophie Alcorn, CEO of Alcorn Immigration Law.
Analysts noted that sweeping restrictions are unlikely due to the difficulties of enforcement. “More likely is a diluted version, with narrower provisions or delayed enforcement,” said HFS Research CEO Phil Fersht.
The bill could also affect US firms’ global capability centres (GCCs), which have developed from offshore back offices to high-value hubs for research, finance and operations.
“It will be hard to pull back from existing work, but new set-ups and expansion may get impacted,” said Yugal Joshi, partner at Everest Group.
The proposed tax will affect the cost advantage that drives GCC location decisions, said Bharath Reddy, partner at CAM.
“However, the lack of availability of appropriate human capital in the US will continue as a problem, and which can be addressed in the near future only through outsourcing,” he added.
(With inputs from Reuters)
