Indian IT on Obama tax plan

[VelMurugan]

Indian IT on Obama tax plan

US President Barack Obama's latest rhetoric 'say no to Bangalore and yes to Buffalo,' has not gone well with corporate India. President Obama has to tax expenditure by US companies on availing services from outside the country from 2011. The move has been proposed to discourage outsourcing and contain the flight of jobs to other countries.

However, India IT Inc feels that Obama's protectionist policy will do little, if anything at all, to end the increasing number of job losses in US or improve its economy. Though there is varied response to how it will impact the Indian IT industry, there is consensus on one point: the new plan will hurt US much more than it can ever hurt Indian IT.

Here's what the leading lights of India Inc have to say on Obama's `retrogate' proposal.

source : indiatimes

[VelMurugan]

Nasscom

India's leading outsourcing lobby Nasscom expressed that the Obama's tax proposals have nothing to do with outsourcing or offshoring.

According to Nasscom the tax plan may actually end up reducing competitiveness of US companies with global operations when compared to their European and Japanese counterparts.

Ameet Nivsarkar, vice president, Nasscom said, "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."

Nasscom said that the impact on global companies working in India would be "marginal" as they already pay an income tax rate in the country of 33.9 per cent while the US rate was around 35 per cent.

Nivsarkar added, "The effect will not be significant on India. Obama's plan is "not at all targeting" India's outsourcing giants like Tata Consultancy Services, Wipro, Infosys and other companies."

[VelMurugan]

CII

The Confederation of Indian Industry also feels that the Obama's remarks were more in the nature of posturing and that it was not intended at curbing outsourcing of work by US firms to Indian companies.

According to Hari Bhartia, vice president of the chamber, 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."

[VelMurugan]

Infosys

Infosys Technologies, India's second largest software and outsourcing company, also felt that the US proposal was aimed at closing corporate tax loopholes and crack down on overseas tax havens.

Reacting to the proposed changes in the US Tax Code, V Balakrishnan, CFO of Infosys Technologies, said, "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," he added.

[VelMurugan]

Mphasis

Jerry Rao, who founded IT firm Mphasis, shares a similar view. The US tax issue, he said, is irrelevant as far as Indian IT providers are concerned. "It may encourage more US companies to invest and create jobs within that country," he said.

However, Phil Harkins, CEO of global leadership training firm Linkage feels that the plan is purely political. He said that Obama's move smacked of US arrogance: "It has nothing to do with economics, and everything to do with politics. But whatever it may be, nothing can stop the reality of outsourcing."

[VelMurugan]

TPI

Siddharth A Pai, managing director of technology analyst firm TPI, said it wasn't the tax benefit or tax loophole that made outsourcing to India flourish all these years. "It's the country's cost and quality advantage, its huge, young labour market and its time zone and demographic advantage."

Ganesh Natarajan, CEO and MD, Zensar, sees no immediate impact on the Indian IT firms in the light of the recurring protectionist voice coming from the US. But he said that the tax reforms that are being talked about have more to do with the global operations of US firms.

[VelMurugan]

Zinnov Consulting

Analyst firm Zinnov said that the proposed revision in tax breaks was counter-intuitive to organisations who were looking at India strategically for long-term growth.

Chandramouli C S, director, Zinnov, said the tax proposals may force American companies to change their outsourcing strategies. "It may help America to come out of the recession faster, but it could have other implications that may not be good for the world," he said. "Nobody really knows what will happen. The impact on Indian outsourcers depends on the impact on their clients."

According to him If the Obama government thinks that outsourcing is a 'reversible phenomenon' and cutting tax breaks will help create jobs in the US, then the thought process is quite short-sighted and needs lot more clarity. Consequences of such a policy spanning across different countries and verticals can be unimaginable.

[VelMurugan]

KPMG

According to Uday Ved, head of global tax consultancy firm KPMG, payments by US companies for services outsourced to India or other countries are treated as normal expenditure and deducted from the company's revenue at present. They are not required to pay tax on that amount.

Adding to it Girish Vanvari, a tax expert and executive director with KPMG, said, "The Obama administration's move was aimed at keeping American money within the country."

"I don't think this will happen. America is one of the largest free markets in the world -- otherwise, you will have companies paying as much as 70 per cent of their revenues as taxes," Vanvari said.

[VelMurugan]

Aegis

Aparup Sengupta, chief executive officer of BPO company Aegis, pointed out that American companies save 60%-75% by outsourcing their back office operations to countries like India. The savings are higher if high-end operations are outsourced.

Sengupta said that in general, a service which costs around $48 per seat per hour in the US is accomplished at $11-12 per seat per hour in India. So, US companies save almost 75 per cent by outsourcing their activities to India. The savings in high-end BPO services are even higher as the fixed cost in all the cases remains the same and the only increment is the marginal increase in wages of trained manpower.

Besides the cost arbitrage, the availability of trained manpower will also be an issue in the US, said Sengupta. Particularly in the IT space, there is a shortage of talent in the US. So, regardless of whether the tax is levied or not, US companies will have to outsource to remain globally competitive.

[VelMurugan]

PwC

Tax experts say that now the Obama administration wants to ensure that companies do not receive deductions for expenses supporting their offshore investments until they pay tax on their offshore profits. The main aim is to disincentivise US companies from retaining profits abroad.

According to Ajay Kumar, Executive Director, PricewaterhouseCoopers (PwC), "The tax deferral rule change will not directly impact third-party deals but will certainly impact the captives."

Assocham

Criticising the US President's announcement, Assocham President Sajjan Jindal said, "Taking resort to protectionist tendency will kill the spirit of competition... And dilute the spirits of WTO."

He said an American survey recently found that the US benefited ten times more than the countries where it outsourced jobs.

[VelMurugan]

Quatrro BPO Solutions

Raman Roy, founder of Quatrro BPO Solutions, said, "These new tax proposals will generate incremental revenue for the US government because it will be taxing the profits of overseas companies. Captives will benefit from this move. However, these benefits will be short-term. In the long run, it might make us less competitive."

FICCI

Industry association the Federation of Indian Chambers of Commerce and Industry (FICCI), said, "Taking measures that would force companies to restrict their economic activities in one vision and not in the other is a retrograde step."

Ficci President Harsh Pati Singhania said 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.