The American President Barack Obama, on Thursday, said that he would end the tax breaks to American firms that shipped jobs out of the country.
In his first State of Union address, he said "to keep jobs at home, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America."
"Now, the House has passed a jobs bill that includes some of these steps. As the first order of business this year, I urge the Senate to do the same... People are out of work. They’re hurting. They need our help. And I want a jobs bill on my desk without delay," he said.
Will India, which is known as the world’s back-office, suffer the most by this move?
According to software services industry body Nasscom, the IT sector accounts for 5.8 per cent of Indias gross domestic product in 2008-09, up from 1.2 per cent in 1997-98.
Though the objective of the move is to arrest the flow of jobs out of America, industry sources aren’t quite sure if the move will have the desired impact? If the U.S. Government disallows offshoring costs as expenses in the books of the U.S. companies, it will increase the cost of offshoring by 35 to 40 per cent for the U.S. firms.
The on-site or onshore cost of a starting level engineer in an IT company is about $50to $60 per hour. The correspondent cost for the same job if done offshore either in India or China works out to around $25-$30 per hour. Assuming that the U.S. Government actually disallows offshore payments as expenses, then the cost of offshoring will go up. Industry experts estimate that the offshoring cost in that event could go up to $35-$ 45. Still it is cheaper for the U.S. companies to off shore jobs to locations such as India or China.
Industry sources aver that the move could at best result in stoppage of fresh flow of transitional works from the U.S. into India and other countries which do offshoring. However, they are of the view that it will not result in any pull-back of jobs already shipped out of the U.S. Nevertheless, they agreed that the move could trigger some hard bargaining by the U.S. companies to hammer down offshoring prices, which could impact the top line and bottom-line of IT companies in India and China which are America-centric in their business. Industry observers predict that the American Presidents move may prod the Indian IT firms to look beyond the U.S. and explore business opportunities in Europe and elsewhere.
The industry body Nasscom is of the view that the Obama announcement will not affect the Indian IT companies. According to Ameet Nivsarker, Vice-President of Nasscom, the move is all about the American companies which have set up their outfits in lower tax areas and booking profits. In any case, the tax difference between India and the U.S. is very minimal. According to Chief Financial Officer of Hinduja Gobal Solutions Ltd., Anand Vora, companies outsourcing are doing it based on financial implications and cost structures. The decisions are commercial and based on economic implications.
It is surprising that the U.S., a torch-bearer of free market economy and which strongly advocated free movement of goods and services across the globe, is now seeking to build protective walls around it. An advocate of de-regulation is now looking at opportunities to re-regulate?