MUMBAI: Indian Information Technology companies may just be in for some turbulence due to the potential of a new tax regime backed by Donald Trump aimed at discouraging US companies from outsourcing work, say industry trackers.
Industry experts say that there is significant concern in the Indian IT industry around the entire Trump trade and immigration agenda.
“The most worrisome aspect of this agenda is the potential changes to the tax laws and the prospect of a boarder tax applied to services. Although the legislation has yet to take its final form and the prospect for passage is still uncertain a boarder tax in the range of 20%-25% would impact the underlying economics of the current services model making some of the work currently off shored unattractive causing some work to return and making further growth prospects for the Indian firms much more challenging.
When a tax of this scale is paired with visa reform which if implemented in its most aggressive form would raise the landed cost of the Indian firms by as much as 20% and an “American first” political climate we can see a substantial attack on the current model which is indeed worrying to every Indian Service executive. I would stress that the boarder tax has the most uncertainty around it at this time as it faces substantial resistance in both parties,” said Peter Bendor-Samuel, CEO, Everest Group, Texas-based sourcing advisory firm.
US clients of India’s $150-billion IT services industry are also inserting new caveats and exit clauses into outsourcing contracts on fears that the Donald Trump administration may bring in a new tax regime that would make offshoring more expensive, experts say.
When asked if there are any structures– tax or otherwise– that Indian IT companies are implementing to overcome the future risk of taxation on Indian IT firms Samuel added, “There are two major ways Indian firms can structurally address the risk of rising protectionism. They can hire more US workers and move work on shore, however, this is expensive and makes them less competitive in the market place, notwithstanding this many of the Indian firms have already launched significant US hiring programs in an effort to somewhat insulate themselves from at least the H1-b threat. The second method is to increase the adoption of digital services models which trades labour for automation, almost all Indian services companies are moving in this direction, however, this is a slow and expensive process and requires both the Indian firms and their clients to adopt new business models.