Urges Senate to end tax breaks; Indian IT firms unperturbed.
In a bid to solve the problem of increasing job losses in the US, President Barack Obama reiterated a campaign pledge to end tax breaks to American firms that outsource jobs overseas.
Immediate reactions from Indian IT firms suggest that there is little cause for worry. They believe that outsourcing is here to stay since recession-hit US firms need to cut costs for which they have to offshore to low-cost destinations like India.
Any moves to curb outsourcing in a major way have significance for India because it figures among the world’s top five destinations, the Philippines, Ireland, China and Brazil being the others, according to a Tholons report. India continues to top the list of outsourcing countries with revenues of $40 billion in IT-BPO export services in 2008. The US accounts for 50 to 60 per cent of Indian IT firms’ revenues.
In his State of the Union address on Wednesday, Obama said, “To encourage ... businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America.”
“Now, the House has passed a jobs bill that includes some of these steps. As the first order of business this year, I urge the Senate to do the same, and I know they will. They will. People are out of work. They’re hurting. They need our help. And I want a jobs bill on my desk without delay.”
Indian IT companies think the move will not hurt business in a major way.
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“What we have understood by talking to suppliers in the US is that the overall macro drivers remain quite strong and offshoring proposition still remains fairly compelling. The specific proposals in President Obama’s speech need to be seen, however,” said Gourav Gupta, Country Head of consulting firm Everest Group.
If the proposal is implemented at all, the end of tax break may have a negative impact of a few percentage points from outsourcers overall savings, which makes the offshoring still fairly compelling, he added.
Indian IT-BPO export services posted 35 per cent year-on-year growth rates in the last five years. The Philippines, too, increased outsourcing revenues 25 per cent from $4.8 billion in 2007 to $6 billion in 2008 while increasing industry employment 33 per cent to an estimated 400,000 employees. Countries like China and Vietnam are emerging competitors.
“President Obama’s statement does not talk of outsourcing at all but is related to the new tax code he is proposing for American companies that use the differential between the tax rates of the US and other countries. This statement is not about outsourcing or offshoring as the tax code is not about outsourcing,” said Ameet Nivsarkar, vice president, global trade development, Nasscom.
“The tax rate differential between India and the US is marginal. So, neither American companies with Indian operations nor Indian companies will be impacted. Indian IT companies have nothing to worry about. This is a macroeconomic statement and is not a cause of undue concern,” he added.
Ganesh Natarajan, Vice Chairman and CEO, Zensar, said: "I completely support the fact that the US government is talking about giving incentives to companies who create jobs there. However, it is difficult to implement tax penalties on firms that do outsource as this is the nature of the business."
A tax expert from one of the top four auditing firms, who did not wish to be identified, said: "I think Obama is talking about the same thing when he took over as President. The way this works is; captive units of US firms in any other geography (it could be India, Philippines, China, etc.) are considered different entities under US tax rules."
US firms pay tax on the income from these subsidiaries only when they repatriate these earnings (profits) to the US. Firms need to pay 34 to 35 per cent of federal tax on these earnings. "In most cases, US firms do not send the money back to the US as they continued to invest this money in expansion and other operations. Now the US government is saying it will match deduction and income together, so they will not get the tax benefits," he said.
Added Eric Peden, director international tax, PriceWaterhouseCoopers, "One suggestion pertains to the deferral of deductions for expenses related to deferred income. This was made since US firms are able to defer US taxation of foreign profits for a long time. But these are yet to get an approval from the Senate."
He pointed out, however, that "business decisions always take into consideration the cost factor. Companies will continue to weigh the tax benefits against the cost savings.
India's second largest IT services firm Infosys Technologies declined to comment on the matter. "We don't want to speak on this till more details are available," a company spokesperson said. Wipro Ltd, too, said it did not want to "react" at this moment.
“This is a complex issue as enormous job losses have taken place in the US and it will be difficult to quantify the tax losses due to this. Moreover, the US consumers may end up paying higher taxes if such a thing happens,” said Alok Shende, principal analyst and founder director of consulting firm Ascentius.
Analysts also said this issue will be debated on and there are many lobbies to protect the interests of India. “We should not be overtly concerned but wait for follow-up action. There is no cause of worry in the short run,” he added.
Meanwhile, industry experts also point out that Indian IT firms have started increasing their presence in foreign countries, including the US. For instance, India's largest IT services provider Tata Consultancy Services (TCS) has close to 7,000 people in Latin America (of which close to 97 per cent are locals). TCS has also set up a delivery centre in Cincinnati, US with a capacity of 1,000 people. So far it has recruited 300 people.
Similarly, firms like Infosys, Zensar Technologies and BPO firms like Firstsource have been increasing their hiring in the US.So far it has recruited 300 people.