Why Indian IT will see little impact due to Trump's new tax act

Indian IT services companies will have a marginal impact due to The Tax Cuts and Jobs Act of US President Donald Trump which imposes a tax on payments made to offshore entities, as the benefits of moving work offshore to low-cost locations such as India outweigh the additional costs.

Most Indian companies have US subsidiaries that employ local resources to either pursue deals or engineers who deliver work onshore with clients. However, IT industry insiders say clients who look at clear benefits of delivering projects faster at lower costs could factor in the taxes in their deals with Indian firms.

" Clients are engaging with us to see and ensure that there is no disruption in the committed projects.  If the contracts are negotiated, the impact of the new act will be felt. It is too early for now," said an executive of an IT company, who did not want to be named.

India's outsourcing industry earns nearly two-thirds of its export revenue from the US. The outcry of job losses and the protectionist stand by Trump administration has forced Indian firms to expand their local centres in the US. They are hiring hundreds of fresh graduates from campuses, training them and deploying them on projects.

Yet there is a shortage of over one million engineers in the US, which forces them to rely on their tested model of having a large workforce in India.

It is not just Indian firms, even global firms are expanding their centres in India, hiring scores of workers in emerging areas to remain competitive. More than  L1,100  global firms have set up local centres in India, hiring close to a million people. They are expanding.

"If you restrict talent coming in, it provides an incentive for the jobs going out. So, from that point of view, the (case for) captives expanding becomes stronger. However, the tax changes in (the US) now disincentives outsourcing to a related party. That in a sense is a counter," said R Chandrashekhar, President of Nasscom in an interview last week.

However, he added the taxes would be looked at the cost of doing business and companies may absorb that. "Whereas talent is not replaceable, if it is not there, you have to pay whatever extra costs are involved,"  he said.