What does the New Outsourcing Tax Law has in Store for India?

What does the New Outsourcing Tax Law has in Store for India?

Tuesday, May 11, 2010

What does the New Outsourcing Tax Law has in Store for India?

At the start of this year the Federal Government announced plans to slash taxes for American companies who generate jobs in the US. The matter of the fact is that now there will be heavy taxes laid on the companies who outsource their jobs from cheap-labored countries like India. India has long been a resourceful country that has helped numerous companies in the western countries from offshore software development. America plans to encourage the creation of more jobs in the US and curtail outsourcing to India and China. So now what? These plans make the future of software outsourcing industry in India look bleak.

As India provides about three quarters of its software outsourcing services to the US alone this new policy comes as a setback for the offshore software development industry in India. Yet IT gurus in India are not much worried as they believe that due the high cost advantage from outsourcing software development to India and China the American firms make huge profits that cannot be brought down by imposing taxes.

Furthermore, this new taxation policy may very well backfire and directly affect the American public. As software outsourcing and allied IT services yield better quality products with cost effective rates as compared to the jobs done nationally, if the companies opt out of software outsourcing then they will be paying more for the onshore production. Hence by saving taxes the companies will subsequently increasing their development costs and hence the consumers will end up paying heavier service taxes. This will directly affect the American public and the tax on outsourcing law can eventually backfire.

With all said, it will be wiser to wait and watch till the Federal Government implements these laws. Also it will be interesting to see how the American market reacts and how the companies cope with the new software outsourcing restrictions. How the government will monitor the outsourcing of software development to India and China? Will American firms overlook the huge cost differentiator and decide to invest in jobs in American soil? Will they be able to find skilled labor just as easily within the American shores? Will these firms find loopholes in the new policy and work around it to continue with their outsourcing activities? How does the government propose to keep retail costs low when the product is manufactured in US, itself?

Everyone in the offshore software development industry is waiting with baited breaths for these tax policies to be implemented. Till then the work will flow as it has been over these years. American protectionism or something else, whichever is the case, surely has significant effects underlying it. Hence it would be hard rather than unfair to speculate the outcomes and their effects on India and the IT industry.