The U.S. President Barack Obama, on Thursday, said that he would end tax breaks to American firms that shipped jobs out of the country.

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 India’s 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.

Cost competitiveness

The on-site or onshore cost of a starting level engineer in an IT company is about $50 to 60 an hour. The correspondent cost for the same job if done offshore either in India or China works out to around $25-30 an 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 offshore 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 bottomline of IT companies in India and China which are America-centric in their businesses. Industry observers predict that Obama’s move may prod the Indian IT firms to look beyond the U.S. and explore business opportunities in Europe and elsewhere.

Commercial decisions

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.”