Impact on Indian IT Industry because of Obama Annoucement

 The US President Obama's proposal to tax expenditure by the US companies on availing services from outside the country from 2011 has received mixed reactions from all over the world.

Most of the industry leaders in India believe that the plan is aimed at curbing the country's outsourcing industry. At the same time, the proposed tax system is also winning few fans in India.

The Scenario

• India's information technology and outsourcing companies employ about 2.2 million people, and the US companies account for about 60 % of their business.
• The US companies either have their own subsidiaries in India or employ Indians by contracting work to local technology and outsourcing companies.
• Many of these Indian operations handle customer service and back-office functions, particularly for the US banks and credit card companies.
• Recently, many US corporations have also expanded their sales, marketing and distribution in India.

The Proposal

• Elimination of a deduction for the US companies when they invest in subsidiaries outside the United States.
• To tax expenditure by the US companies on availing services from outside the country from 2011.

The Reaction

Let us try to see what various people are saying before forming our own opinion:

NASSCOM (India's leading outsourcing lobby):

• The tax plan may actually end up reducing competitiveness of US companies with global operations when compared to their European and Japanese counterparts.
• The proposals appeared to be aimed at addressing the tax rate differentials that exist across the world. It will impact American headquartered companies with overseas operations

CII (The Confederation of Indian Industry)

• It's an internal issue. It will only reduce their competitiveness. He added, "It is a populist posture. Perhaps his (Obama's) intention was not the same. However, it sends a wrong message.

Infosys (India's second largest software and outsourcing company)

• It is not for us. It is for US companies that have operations in other destinations. It will not have an impact on Indian companies.
• We do not believe that it has anything to do with IT outsourcing done by US corporations.

Mphasis

• It is irrelevant as far as Indian IT providers are concerned. It may encourage more US companies to invest and create jobs within that country

FCCI (Federation of Indian Chambers of Commerce and Industry)

• While Obama's move would have some impact on the US investment abroad and into India, in the long run this would only run counter to the interest of US corporations seeking global presence.

The Opinion

It was the availability of young talent pool, the time zone factor and the cost advantage that made outsourcing in India flourish in the last decade. It was not due to any tax benefit that the US firms enjoyed.

US companies save 60-75% by outsourcing their back office operations to countries like India. The overall impact would be clearer once the exact structure of the taxation is announced. Nobody really knows what will happen in the longer run but the move has definitely diluted the spirit of the global economy and the flat world.

(Sources: New York Times, indiatimes)