The recent declaration by US President Barack Obama that there will be no tax breaks for American companies outsourcing their work abroad had brought about mixed reactions from corporate India. Here’s what they have to say

US president Barack Obama, in his speech to US Congress about economic stimulus and financial recovery, made it clear that there will be no tax breaks for the US companies that outsource their jobs abroad. This means, the US companies will be discouraged from outsourcing their work to India and other South Asian countries. There are huge number of American companies who outsource their work to Indian companies. This will certainly have some major impact on the outsourcing industry in India too. So what is corporate India’s take on this?

Anil Kaul, Founder and CEO, AbsolutData Research and Analytics, expresses, “We have to keep one thing in mind that Barack Obama has asked for changes to the law but it is the US Congress that will have to make the changes. We will have to wait to see what specific changes they come up with, as there can sometimes be substantial modifications to the President’s proposal that are made in the US Congress before the law is passed. There are two changes that Barack Obama has asked for. The first deals with tax laws and the second deals with how investments made abroad are treated. The tax law change means that US subsidiaries abroad will get taxed at the US tax rate rather than the local tax rate (which typically tends to be lower). This law won’t have any implications for outsourcing since, outsourcing operations are typically treated as cost centres rather than profit centres as they do not generate any revenues.

Adding further to this he says, “I believe, this law, if passed, will make US companies less competitive in foreign markets and hence hurt the US economy. My view is that this law will get passed only with major modifications that will exempt operations of most of the US companies except those in the financial services arena (such as hedge funds) that have used this law to avoid paying taxes. The second part of the law affects how foreign investments are treated from an accounting perspective. The current law allows the foreign investments to be treated as an expense rather than an investment. Changing of this law will potentially impact the amount of foreign investments that US companies do and this can potentially impact the outsourcing industry.”

According to Mukesh Sharma, Founder & CEO, QA InfoTech, “Indian companies may have a little impact with this stance taken by the President but I don’t think that we need to worry as these tax proposals have nothing to do with off-shoring or outsourcing. The proposals appear to be aimed at addressing the tax rate differentials that exist across the world. It may have an impact on American headquartered companies with operations overseas. I don’t think that US would take any measure that would hurt its global competitiveness. Outsourcing has enhanced the competitiveness of US corporations and has created more jobs within the US economy.”

It is being said that if this comes into practice, their might be some major repercussions on the outsourcing companies in India. What according to them will be the impact of this on Indian outsourcing business? Kaul states that the change, if carried out, will not directly reduce outsourcing. “I do not believe that these changes in the US laws will have any major or for that matter even minor impact on the outsourcing industry. US companies have been outsourcing to India and other similar countries for cost reduction reasons, particularly labor costs. This reason to outsource will not get affected by the proposed changes and hence I do not think that outsourcing industry will get affected by these laws. What might get affected is the mix of third party operations versus captives. The change in the investment law might reduce the attractiveness of opening a captive centre compared to having a third party conduct the outsourcing operations,” he avers.

Similarly, Sharma further pints out, “As I mentioned earlier, American companies will be hit more by this decision than its impact on the Indian outsourcing industry. Outsourcing from the perspective of the big multinational may suffer some hit but outsourcing per se will not be affected. We remain unaffected by this tax proposal. Many IT companies announced cancellation of job interviews after the news of Obama’s tax plans. Even though Indian companies would have a little impact by this proposal, yet the worries persist.” According to him, the best approach is to enhance productivity, workflow management and most importantly reduced costs and turnaround time and help improving the liquidity scenario in the economy.

Even though a lot of discussions are on about this news, India Inc. is still hopeful that it will not be affected in a negative way and is looking forward to some positive changes.