US Legislation to Tax IT Outsourcing
A proposed bill by Republican Senator Bernie Moreno, known as “The Halting International Relocation of Employment Act” (HIRE Act), seeks to impose a 25% tax on American firms outsourcing jobs overseas, which could significantly impact Indian tech companies.
Impact on Indian IT Companies
- Indian IT firms may face increased pricing pressures and reduced cost advantages.
- The bill could slow down deal flows and make these companies more dependent on non-US markets.
- US clients, constituting over 60% of India's IT outsourcing revenues, might reduce spending, pause large deals, or renegotiate terms.
- Pricing pressure is expected to rise, especially in commoditized IT services like application development and maintenance.
Market Reactions and Strategies
- India's IT stocks experienced declines, with the Nifty IT and BSE IT indices dropping nearly 1%.
- Companies are diversifying into markets in Asia, Japan, Australia, Nordics, and the Middle East to mitigate reliance on the US.
- Nitin Bhatt from EY India noted that cumulative taxes could raise offshored services costs by up to 60%.
Concerns and Consequences
- Clients may demand IT services providers absorb tax impacts or lower fees, potentially leading to increased local hiring in the US.
- Saurabh Gupta of HfS Research emphasizes the man-made nature of this crisis, which may affect both Indian providers and US clients.
- Any outsourcing restrictions could elevate delivery costs and unpredictability.
US-India Trade Relationship
- The US is India's leading export destination, making up 17.7% of total exports in FY24.
- India's trade surplus with the US stands at $45.7 billion, with $38 billion in goods and the remainder in services, primarily IT and software.
