The Indian IT software and BPO industry earns about $60 billion a year.
U.S. President Barack Obama’s statement on the need to create jobs in the U.S., which has been encapsulated by the media in the phrase “Say no to Bangalore, yes to Buffalo”, has predictably sent the less-informed in the political and media world into a panic.
His decision to clamp down on U.S. companies outsourcing operations overseas has fuelled dark scenarios about the possibility of a sharp contraction in outsourcing to Indian shores and large-scale unemployment in the ITES sector.
The fact that the industry is already decelerating has added to the fears in major IT centres such as Bangalore, Pune & Hydrabad. The Indian IT software and BPO industry earns about $60 billion, of which about $47 billion is exported. The industry directly employs about 2.2 million people.
Presenting his case for a change in the tax code in his recession-hit country, Mr. Obama said at present the regime levied a lower tax on a company investing in a Bangalore subsidiary than if it invested in Buffalo, New York.
How real is the threat posed by Mr. Obama’s new proposals?
U.S. President Barack Obama’s statement on the need to create jobs in the U.S., which has been encapsulated by the media in the phrase “Say no to Bangalore, yes to Buffalo”, has predictably sent the less-informed in the political and media world into a panic.
His decision to clamp down on U.S. companies outsourcing operations overseas has fuelled dark scenarios about the possibility of a sharp contraction in outsourcing to Indian shores and large-scale unemployment in the ITES sector.
The fact that the industry is already decelerating has added to the fears in major IT centres such as Bangalore, Pune & Hydrabad. The Indian IT software and BPO industry earns about $60 billion, of which about $47 billion is exported. The industry directly employs about 2.2 million people.
Presenting his case for a change in the tax code in his recession-hit country, Mr. Obama said at present the regime levied a lower tax on a company investing in a Bangalore subsidiary than if it invested in Buffalo, New York.
How real is the threat posed by Mr. Obama’s new proposals?
What the U.S. President has actually proposed is a change to the tax code, especially in the manner in which it provides incentives to U.S. companies investing in their own subsidiaries in locations outside the U.S.
The move is not against outsourcing per se. Rather, it is an attempt to ensure that the tax credits given to U.S. companies actually result in investment within the United States, a perfectly reasonable move at a time when every national leader is desperately trying to provide an economic stimulus to their national economies.
The move is not against outsourcing per se. Rather, it is an attempt to ensure that the tax credits given to U.S. companies actually result in investment within the United States, a perfectly reasonable move at a time when every national leader is desperately trying to provide an economic stimulus to their national economies.
Views of Different Authorities
Some observers see the move as a means of clamping down on the use of offshore tax havens, a matter of serious debate at the recent G-20 Summit.
Some observers see the move as a means of clamping down on the use of offshore tax havens, a matter of serious debate at the recent G-20 Summit.
Infosys, a leading player in the outsourcing business, has stated that it views the move as a step “to close corporate tax loopholes on U.S. multinational corporations and crack down on their overseas tax havens”. The company said, “We do not believe that it has anything to do with IT outsourcing done by U.S. corporations.
NASSCOM stated that the move is unlikely to have any serious impact on the Indian IT industry. According to NASSCOM president Som Mittal, “The proposed changes will affect Shanghai more than Bangalore.” Shanghai is after all a far more important destination for American outsourcing, especially manufacturing.
Pramod Bhasin, Chairman of NASSCOM, said tax rates play a “very minor role in determining where companies locate their business”. Specifically, in the case of the IT industry, companies’ locational preferences are less governed by tax rates than by factors such as the availability of talent, cost of such talent, the investment climate and other more important determinants.
Actual Conclusion
In fact, the proposal is more likely to impact “captive” IT units operated by U.S.-based multinational companies in India. However, MNCs with large Indian captives, such as IBM, General Electric and Citigroup, are unlikely to wind down simply because of the tweak given to the tax code. Their motives for locating parts of global operations in offshore locations are determined by their strategic interests, not by short-term changes in tax rates.
Moreover, the logic of establishing captives is driven by their desire to ensure that their intellectual property resides within the company. This is particularly critical in high-end software services business. In this context, reports suggesting a sharp increase in the cost of outsourcing are way off the mark because the increase in the tax constitutes only a small fraction of the overall cost.
In fact, the proposal is more likely to impact “captive” IT units operated by U.S.-based multinational companies in India. However, MNCs with large Indian captives, such as IBM, General Electric and Citigroup, are unlikely to wind down simply because of the tweak given to the tax code. Their motives for locating parts of global operations in offshore locations are determined by their strategic interests, not by short-term changes in tax rates.
Moreover, the logic of establishing captives is driven by their desire to ensure that their intellectual property resides within the company. This is particularly critical in high-end software services business. In this context, reports suggesting a sharp increase in the cost of outsourcing are way off the mark because the increase in the tax constitutes only a small fraction of the overall cost.
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