An increased tax burden on businesses that outsource work abroad is the goal of a recent legislative proposal in the United States.
The Indian IT services industry now faces additional uncertainty as a result of this plan.
US Outsourcing Tax Proposal Sparks Fresh Uncertainty for India’s IT Sector
Two of the sector’s main advantages, strong order inflows and stable prices, may be weakened by the action.
Despite being introduced by a Republican senator, the bill has not yet become law.
The Bill, even as it stands, gives Indian IT companies the chance to reevaluate their technology budgets because US businesses are their biggest clientele.
The pace of contract closures may slow down if budgets are re-examined.
An industry expert said, “There is already a lot of business uncertainty which is making clients tighten their purse strings. While the Bill is being discussed, they would not want to commit budgets which may add to their tax burden.”
Long-Term Agreements Might Include Discounts
Contracts signed in this setting are probably long-term agreements, and in the short term, these long-term agreements might include discounts.
Pareekh Jain, CEO of EIIRTrend, stated, “All IT companies will look to secure deals, as is evident from their order books. However, they will ask for long-term commitment to ensure that when things get better, the deals can be ramped up. As a result, margins of IT companies may come under further pressure.”
While they await clarification on the Bill, US clients might also temporarily reduce their transactions.
Sharper price negotiations may also result from this circumstance.
Customers are already concentrating on cost-cutting initiatives, giving “run” spending precedence over “change” spending.
Customers are getting greater concessions from sellers in this setting.
Businesses are now able to insist that productivity increases be factored into contracts, which lowers vendor realisations, thanks to the quick adoption of generative AI.
It is anticipated that clients will find ways to mitigate the higher cost if the planned outsourcing tax is implemented concurrently with these pressures.
According to experts, negotiating smaller transaction sizes or reduced billing rates with Indian IT partners would be the most straightforward ways to offset such expenses.
