Indian IT firms looking for ways to soften US tax blow
10% tax on payments from US units may affect Indian software companies’ export competitiveness if the costs are passed on to customers, say experts
New Delhi: An anti-abuse provision in the US tax code that President Donald Trump signed into law last month is forcing Indian information technology (IT) services companies to look at ways to mitigate the impact of the tax blow.
The Tax Cuts and Jobs Act, designed to encourage American companies to invest and create jobs locally, seeks to discourage offshoring of work to overseas group companies by way of a 10% tax on the payments made to such offshore entities.
This tax, called the “base erosion and anti-abuse tax”, or BEAT, hits Indian multinational companies in the IT sector, which caters to their US clients through American subsidiaries.
Tax experts said the 10% BEAT makes their payments to the Indian parent an extra cost of doing business in the US and that Indian multinational companies are exploring ways to retain their competitiveness by reworking their business strategy.
“It can be said clearly at this point that this (BEAT) will disincentivize outsourcing to a related party,” said R. Chandrasekhar, president of Nasscom—the apex industry body for the IT sector—and former IT secretary to the government of India. Chandrasekhar, however, was quick to add that unlike the early days of India’s IT sector’s boom, today, overseas entities offshore their IT services requirements to Indian firms not primarily because of cost, but because of the quality of skill.
Vipul Jhaveri, partner, Deloitte India, said the 10% BEAT on payments US companies make to offshore related parties becomes an extra tax cost, which could impact the competitiveness of Indian IT and ITeS (IT-enabled services) exports if it is passed on to the ultimate consumer in the US.
“Indian multinational companies are exploring ways of mitigating the impact of BEAT in their overall cost of serving US customers,” said Jhaveri.
Emails seeking comments sent to Infosys, Tata Consultancy Services, Wipro and Tech Mahindra on 19 January remained unanswered.
According to Chandrasekhar of Nasscom, the impact of BEAT on Indian multinational firms will depend, to a large extent, on the exact nature of the transaction, the nature of corporate holding and the business response that the company adopts in dealing with the change in laws.
“The bottom line is that the impact is not uniform on all transactions. Obviously, every company will work to minimize the tax cost on their operations and all of this will be weighed against the tax benefit that the tax reform brings,” said Chandrasekhar.
Among other measures, the Tax Cuts and Jobs Act lowered the US corporate tax rate from 35% to 21%, which is applicable to all US companies. Apple Inc. responded on 17 January saying it will invest $30 billion in expanding US operations, help create 20,000 jobs and pay $38 billion in taxes on repatriated profits.
In 2016-17, the US accounted for 57% of India’s total $111 billion of computer software and IT-enabled services exports, according to Electronics and Computer Software Export Promotion Council (ESC), the Press Trust of India reported on 25 January.
Nasscom had said in an outlook issued in June last year that IT and business process management exports are set to grow 7-8% in 2018-19.
One risk that the industry faces is protectionist tendencies in key markets. Prime Minister Narendra Modi had in his address at the World Economic Forum annual summit in Davos last week criticized the rising wave of protectionism in the world that is threatening globalization.