India’s $283 billion information technology sector is bracing for a prolonged period of uncertainty as a proposed U.S. bill, the HIRE Act, threatens to impose a 25% tax on American firms that use foreign outsourcing services. According to analysts and lawyers, this has already caused clients to delay or renegotiate contracts as they assess the potential financial impact. While the bill in its current form is considered unlikely to pass, it is expected to initiate a gradual but significant shift in how major U.S. companies procure IT services from the world’s largest outsourcing market.
The sector, which contributes over 7% to India’s GDP and counts giants like Apple, American Express, and Citigroup as clients, now faces a dual challenge. The proposed legislation comes at a time when it is already struggling with weak revenue growth in its key U.S. market, where clients are deferring non-essential tech spending due to inflationary pressures. The HIRE Act, introduced by Republican Senator Bernie Moreno, aims to tax companies that hire foreign workers over Americans and would bar firms from claiming outsourcing payments as tax-deductible expenses.
EY India’s compliance head, Jignesh Thakkar, warned that the proposed changes could “alter the economics of outsourcing,” significantly increasing the tax liability for international service contracts. He estimated that when combined with state and local taxes, the effective levy on outsourced payments could reach as high as 60% for some companies. This potential cost has created immediate hesitation among U.S. firms, disrupting deal flows and negotiations.
However, analysts anticipate fierce resistance from U.S. corporations that are heavily reliant on cost-effective overseas IT services, setting the stage for extensive lobbying and potential legal battles. The outcome of this debate will determine whether the bill is diluted or fails altogether, but it has undoubtedly injected a new layer of risk and complexity into the fundamental business model that has fueled India’s IT industry for over three decades.
