US HIRE Act: India's TCS, Infosys-led IT sector is nervous as US proposes outsourcing tax

The US HIRE Act proposes sweeping changes that could alter the economics of outsourcing, according to experts.

India's massive IT sector, led by Tata Consultancy Services Ltd. and Infosys Ltd., faces a prolonged period of uncertainty as the US weighs an outsourcing tax, according to analysts.

India's $283 billion IT industry has thrived for more than three decades by exporting software services to US clients. (Unsplash)

The bill will initiate a gradual shift in how big-name firms in the world's largest outsourcing market buy IT services, they said.

"The US HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts," Jignesh Thakkar, compliance head at EY India, told Reuters. "In some cases, combined federal, state and local taxes could push the levy on outsourced payments as high as 60%, he said.

The US HIRE Act, introduced by Republican Senator Bernie Moreno, proposes taxing companies that hire foreign workers over Americans. The tax revenue will be used for US workforce development. The bill also seeks to bar firms from claiming outsourcing payments as tax-deductible expenses.

“While its partisan proposal may seem initially attractive, it's ultimately an artificial cost which makes organisations less competitive and profitable globally,” Arun Prabhu, partner at Cyril Amarchand Mangaldas, told Reuters.

“When political noise turns into regulatory risk, clients quickly insert contingencies, reopen pricing and demand delivery flexibility,” said HFS Research President Saurabh Gupta. “Clients will simply take longer to sign, longer to renew, and longer to commit transformation dollars.”

India's $283 billion IT industry has thrived for more than three decades by exporting software services to clients including Apple, American Express, Cisco, Citigroup, FedEx and Home Depot. It has grown to make up over 7% of GDP. However, it has also drawn criticism in customer countries over job loss to lower-cost workers in India.

The bill could not have come at a worse time for India's IT sector, which is struggling with weak revenue growth in its mainstay US market as clients defer non-essential tech spending amid inflationary pressure and tariff uncertainty.

Still, with US firms having to pay the tax, those heavily reliant on overseas IT services are likely to push back, setting the stage for extensive lobbying and legal battles.

Nasscom and IT firms TCS, Infosys, HCLTech, Tech Mahindra, Wipro and LTIMindtree did not respond to Reuters' requests for comment on implications of the US HIRE Act.

Backlash Beckons

Companies are likely to lobby hard against the proposed bill and challenge it legally if passed, legal experts and industry watchers said.

“A bill like this would probably face a lot of backlash from US companies that rely heavily on outsourcing, who would likely bring litigation to challenge various aspects of the bill, if it were ever to be passed into law,” Alcorn Immigration Law CEO Sophie Alcorn told Reuters.

Sweeping restrictions are unlikely given the practical hurdles in enforcing the bill's provisions, experts said. “More likely is a diluted version, with narrower provisions or delayed enforcement,” HFS Research CEO Phil Fersht said.

The bill could also affect US firms' global capability centres, which have evolved from low-cost offshore back offices to high-value innovation hubs that support operations, finance, research and development.

“It will be hard to pull back from existing work, but new set-ups and expansion may get impacted,” Everest Group partner Yugal Joshi said.

The proposed tax will impact the cost arbitrage advantage that is among the deciding factors when establishing a GCC, said Bharath Reddy, a partner at CAM. “However, the lack of availability of appropriate human capital in the US will continue as a problem, and which can be addressed in the near future only through outsourcing.”