Will US tax proposals impact Indian IT-BPO?

Will US tax proposals impact Indian IT-BPO?

Though the overall sentiments is that the tax proposal would not affect India, one cannot ignore the underlying feeling of apprehension

Pankaj Maru

Tuesday, June 09, 2009

MUMBAI: Last month, U.S. President Barack Obama vowed to create employment by ending tax breaks for local companies that ship jobs abroad, while companies will enjoy tax breaks that create jobs in the US.

Though, the tax proposals, which also aims to raise $210 billion over a decade, still awaits Senates' approval, it has already caused major concern for most American firms, which outsource services, business processes and have global operations.

Some U.S.-based multinational companies have already raised their voice against this and a group of technology heavyweights, including chiefs of IBM and Motorola Inc has reportedly enlisted a former Clinton administration economist to resist Obama's plan to boost some taxes on overseas profits.

Though the overall sentiments is that the tax proposal would not affect India, which is one of the most sought-after outsourcing destination, one cannot ignore the underlying feeling of apprehension.

According to Ameet Nivsarkar, Nasscom's vice president – Global Trade, some of tax amendments are specific to local American firms based in the US. “It's mainly to balance out tax differentials on the revenues/profit earned from businesses done outside the US.”

Though the new proposals are not going to impact the Indian IT-BPO sector, Nivsarkar points out that it could have some impact on those American firms which have India operations.

“It's the political pressure that pushes governments to come out with such moves,” he added.

According to him, construction, manufacturing, retail, finance and insurance are the non-IT sectors, where large size job-cuts have occurred, so it has nothing to do with Indian tech sector.

Last year, the Indian tech sector earned 48 billion dollars on IT-BPO exports, where about 62 per cent revenue came from the US, according to Nasscom.

On the other hand, Safir Adeni, Sitel India's managing director and CEO, said the US tax move would impact the Indian BPO sector on short term as many smaller companies would follow Obama's policies, but on mid and long terms, companies would realize that it would be unsustainable and hence they would revert to a logical conclusion of finding the right destination at the right cost to outsource.

“It's not particular to the Indian BPO industry but the move is to primarily stop local Americans from losing their jobs,” said Adeni. He expressed confidence that eventually the right business sense would prevail for policy makers to temper their policies.

While, Aparup Sengupta, managing director and global CEO Aegis Limited, said that there's no drive against outsourcing. “There's a drive for employment creation for Americans and global outsourcing companies will be able to address this need by balancing costs through right shoring,” he added.

Further, S Nagarajan, co-founder and CPO of 24/7 Customer opined that the impact of US proposal would have a minimal effect on outsourcing.

“The proposals are introduced to close corporate tax loopholes in the U.S. and to end tax incentives offered to American headquartered companies with overseas operations. It's impact on global companies that earn profits in India would be marginal,” explained Nagarajan.

Narasingarao Dataram, president of e4e Business Solutions India, also expressed the same opinion that the policy shift would not affect the Indian BPO sector significantly, primarily because companies today are continuously looking at reducing costs and outsourcing is a strategic decision to review use of capital.

“Even if a few companies keep their non-core business functions in-house, there will be many others which will find compelling reasons to move these functions offshore,” he explains.

“Also, we must realize that it's not only the wage disparity between the US and other leading offshore countries like India that is the driver of outsourcing, but also the high quality of the output and services from these destinations.”

According to Dataram, this policy will not impact the Indian sector as much as it is made out to be and we have now overcome the learning curve and have established our credentials to the industry world-wide.

“We are no-longer considered a low-cost destination but also a serious value-creating and innovative industry. IT services have become the lifeline of the economies of many countries,” he comments.

Moreover, he points out that the domestic market is a huge opportunity.

“Opportunities to provide IT services to corporates in India are immense, hence local outsourcing companies will not only overcome minor hurdles but also continue to grow,” Dataram stresses.

However, Adeni suggests that the Indian sector would need to reduce dependency on the US market and Indian companies would do well to focus on emerging markets to sustain their business.

And in the words of Sengupta, “Indian BPOs should think global and that's the only way to create flexibility of delivery destinations.”

Nagarajan goes a step further and says, “Companies will need to focus on providing different type of services that are IP and knowledge based rather than labor intensive.”

He concludes that IT and ITeS industries in collaboration with NASSCOM and government need to dialogue with US policy makers to improve and create a more competitive global business environment, rather than focusing on impact of outsourcing alone.

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