8 reasons IT Inc shouldn’t fear Obama

[VelMurugan]

8 reasons IT Inc shouldn't fear Obama

As a noted columnist wrote, US President Barack Obama is at it again, bashing Bangalore. At a White House event this week to unveil tax reforms aimed at forcing American multinationals to pay corporate taxes -- and keep jobs -- at home, Obama lashed out at the current US system, saying it encouraged paying "lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Though Obama's love/hate for Bangalore is debatable, one thing that a large section of both corporate India and US believe is that the new tax proposal can do little, if anything, of what it is aimed at: creating American jobs.

Here's why Mr Prez's new tax plan will fail not hurt Indian IT.

source : indiatimes

[VelMurugan]

`A tax system cannot be a job engine'

President Obama said that his new tax plan will do a lot of things including create more US jobs. He said while announcing his proposals, "We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits."

In turn, Obama said that the government would offer a tax cut to companies that do their research and development in the United States. And that will "jump-start job creation," he said.

However, most tax policy experts differ with the US Prez here. They feel that the proposals, if implemented, could raise revenue for the government but are unlikely to boost US jobs.

Eric Toder, a fellow at the liberal Urban Institute and former assistant secretary of tax analysis for the Treasury Department, wrote in the Tax Policy Center's blog Tax Vox, "Employment is determined by overall demand for goods and services, not by targeted tax and spending provisions."

[VelMurugan]

Will hurt US companies' competitiveness

The overriding view is that the Obama tax plan will hit US firms harder than the Indian outsourcing industry. Most experts feel that the President Obama's tax plan will badly hurt the competitiveness of US MNCs. Critics also contend that increasing the tax bite on US companies will put them at a disadvantage with their foreign competitors.

As Indian software body National Association of Software and Service Companies (Nasscom), said, "This may actually end up reducing competitiveness of US companies with global operations when compared to their European and Japanese counterparts."

[VelMurugan]

It is total savings, not just taxes

According to analysts what Obama's new tax plan fails to gauge is that US tax policy is not the only factor a company weighs in deciding whether to invest overseas.

As Aparup Sengupta, chief executive officer of BPO company Aegis, said, 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% 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.

"It is wrong to assume that we are outsourcing for evading taxes - we continue to hire more workers here because traditionally, it's been very difficult to find professionals with adequate skills in the US," said a senior executive at one of the captive centres who did not wish to be identified because his company does not allow media interviews.

Also, according to tax experts, companies do not move jobs to India because the tax rate is lower; they do it because labor costs less.

[VelMurugan]

It's the Desi talent

Besides the cost arbitrage, the availability of trained manpower too will be an issue in the US, believe experts. 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.

US companies such as Accenture, which employs around 45,000 professionals in India, said that they never chose India for tax benefits. "India was chosen because of better skill pool available in large numbers," said a Bangalore-based Accenture official, who did not want to be quoted.

Siddharth A Pai, MD 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.''

[VelMurugan]

May hurt US economic recovery

Some experts believe that any protectionist initiative by the US government could delay the country's economic recovery. Experts warn that protectionist measures taken by the US could be as harmful as the Smoot-Hawley Tariff Act imposed in 1930, which had increased tariff on US imported goods to record levels and is popularly regarded as one of the factors that deepened Great Depression.

The chief executive of Caterpillar Inc, Jim Owens, said that any US policy that does not allow corporations to defer some taxes on foreign income will hurt the economy. If the US designs a tax system that handicaps US multinationals, it will be to the economy's long-term detriment. Owens said.

[VelMurugan]

Too many ifs and buts on the way

Also, analysts say that Obama has only proposed tax reforms. There needs to be an extended debate on these before they can be implemented, as they require existing laws to be changed.

Many past attempts to pass similar laws have failed.

The proposed tax plan has met with severe criticism from a large number of US companies. Business groups in the US have assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger US jobs.

[VelMurugan]

Little difference in India's case

The proposal hinges on tax rate differentials between the US and other countries and this differential in the case of India is just 1.1 per cent. In India, US companies that earn profits are subject to a tax rate (including surcharge and cess) of 33.9 per cent. This is only 1.1 per cent less than the taxes a company has to pay in the US (35 per cent).

[VelMurugan]

Proposal fails to enthuse US Congress

President Obama's proposals have met a sceptical response from leading Democrats and Republicans in Congress. Montana Democrat Max Baucus, who chairs the Senate finance committee told media that it is true that other countries give favourable tax treatment to their companies, and we have to make sure we're not shooting ourselves in the foot while trying to raise some revenue.

US business groups are gearing up for a major battle when the proposals go before Congress, arguing that the tax changes would make US firms less competitive in the global market.