Obama's Tax plans to hit India Inc
6 May 2009, 0204 hrs IST, ET Bureau

BANGALORE | NEW DELHI | MUMBAI: A day after President Barack Obama said his administration would end tax breaks for American companies expanding

their overseas operations, several US multinational firms and Indian outsourcing companies expressed concerns about any potential legislation aimed at curbing offshoring of IT and back-office projects to countries such as India.

While companies such as TCS, Wipro and Infosys are preparing to cope with anti-offshoring sentiments gaining momentum in the US - the world's biggest market for services, executives at large US firms having captive operations said ending tax-deferral could impact their expansion plans.

India's second-biggest exporter Infosys, which serves customers such as American Express and Bank of America, said it is monitoring the situation. "Right now, I do not see any impact on our business," Infosys CEO S Gopalakrishnan told ET on Tuesday.

But President Obama's reference to Bangalore in his speech has made the IT industry nervous. Obama said on Monday that his administration wanted to fix the loopholes in the country's tax systems. "It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York," Mr Obama said.

A top executive of an Indian IT company said the US president's utterances will impact sentiment and 'vitiate the atmosphere'. Obama statement on Monday is the latest in a series of remarks he has made opposing outsourcing and job losses in the US from the time he began his presidential campaign almost two years ago.

US companies have to pay almost 35% corporate tax on income generated in the country. "Under the current law, firms don't pay taxes to the US government on income earned abroad until they bring the money back to the United States. Obama wants to reform this part of the law (which is called 'deferral')," Rosanne Altshuler, a Rutgers University economist speing in international taxation, told ET in an interview last month. Ms Altshuler argued that by investing abroad, US multinationals are not necessarily cutting jobs in the US.

"Recent economic research suggests that investing abroad leads to more investment and employee compensation in the United States," she said.

With the US accounting for over half of India's exports, any initiative to curb offshoring will make things worse for Infosys and other Indian IT companies which are already struggling to cope with lower demand for services because of the ongoing recession.
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  • It is not cleaer what is the impact on the US companies due to this. If they are taxed on their net profit which are outsourced to foreign countries like india still the economics win. The cost of hiring the work force in US is atleast 10-20 times more than that are outsourced. If the input cost is more then the selling price will also be more. The sale will come down this will have two side impact and finally the company will die.

    If they are taxed in US 35% and in india 33.99% the indian government may give tax holiday to foreign companies with condition for minimum business/ investment to be made in in india.

    As many business are given 100% tax exemption in SEZs there will not be any problem in handling this issue.

    On the other hand if the US government tax the entire expenses instead of net profit ??????? who knows!!!! then we have to see the behaviour of business people then.

    One thing is clear.

    1.The outsourcing was not done due to invitation from India
    2. Business people wanted less input cost for the efficient work
    3. Indians work 16 hrs for 8 hrs pay with out any deterioration in the out put.
    4. They dont even speak for their rights and no strik at all.
    5. Even our indian employees will reach home at midnight say 2.00 AM by catching Lorry or Even they sleep in some places (like busstop, Railway station) and reach home in the morning.

    Can the US people do this? if s why this situaion arised?

    In a globalised market can they operate by siting in US? that too round the clock?

    When any one become a politician, any where in the world, the stinct, colour, approach will automatically change. Obama is not an excuse for that. We have to wait and watch. As such i dont c any danger in this move. It will only increase the principle of swadesiam by our great leader "Gandhi"

    Things will change. Lets us hope for the best.

  • Dear friend,

    Some say the otherway. Creating a job in US warrants higher billing rate for the same output as compared to outsourcing. This will make the quotes of US companies more than the other country, say Indian companies participating in the enquiry/tender. The increase in rates will be much higher than the tax the US companies may have to pay now in case of withdrawal of deferral provision.