US Clients On Wait-And-Watch Mode As Trump Admin Evaluates Outsourcing Tax

Chennai/Hyderabad: India’s IT and outsourcing sectors have started feeling the heat of the US proposal to levy 25 per cent tax on American firms using foreign outsourcing services.

While many US clients are on a wait and watch mode and hence delaying the contracts, some have also started renegotiating the pricing to accommodate the tax.

“US clients are in a wait-and-watch mode in terms of signing new contracts. We do not expect any cancellation of existing contracts. But renegotiations are on the cards. Contracts are signed for six-months, one-year, three years or five years. By September, usually new contracts or renewals will be on the table for negotiations. When the margins are under pressure, the clients will negotiate on pricing. Large companies have the bandwidth to absorb the taxes, but the smaller outsourcing companies might face a challenge,” a top official in a leading IT company said.

According to him, if the taxes are levied, new models will emerge, and companies might tap talent in tier II and tier III cities to cut costs.

Of the $282-billion IT services and hardware exports, 62 per cent goes to the US. The business processing outsourcing industry and Global Capability Centres make the total outsourcing industry in India much bigger. India's outsourcing industry has been going through uncertainty ever since a bill to tax the industry has been debated.

“If such a tax is implemented, US companies may delay or renegotiate contracts, which could directly affect revenues of Indian IT firms. The ripple effect will be felt by lakhs of employees here, with the possibility of slower hiring, delayed onboarding, and pressure on wages. At the same time, this development also highlights the need for Indian IT companies to reduce over-dependence on US markets,” said Harpreet Singh Saluja, President, Nascent Information Technology Employees Senate.

As per Reuters, last week, U.S. Republican Senator Bernie Moreno introduced the HIRE Act which proposes taxing companies that hire foreign workers over Americans, with the tax revenue used for U.S. workforce development. The bill also seeks to bar firms from claiming outsourcing payments as tax-deductible expenses.

This month, White House trade adviser Peter Navarro reposted a call from far-right activist Jack Posobiec for tariffs on services, not just goods.

"The HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts," EY India's compliance head Jignesh Thakkar was quoted by Reuters.

In some cases, combined federal, state and local taxes could push the levy on outsourced payments as high as 60 per cent, Thakkar said.