Monday, February 6, 2012

Obama’s Outsourcing Policy–Effect on Indian Companies

With the elections coming up and Obama announcing new outsourcing policy, It is important to understand what toll does it take on Indian Companies. Most of the American companies are against the policy in the sense that the new policy increases their operating costs, whereas the Indian companies are in a dilemma about what to do.

The objective of this article is to understand the position of American and Indian companies who outsource their jobs way back to India from US. For this, We should first understand what is the difference between Outsourcing and Offshoring.
Offshoring is when a US company sends jobs that once existed within that US company overseas to a subsidiary of its own, for instance, if an Cognizant project engineer’s job gets moved to Bangalore or Hyderabad or New Delhi, but the new employee is still a Cognizant worker. Outsourcing is when a US company pays another company altogether for doing that job, much of it ends up in India, but a big store in New york lets another company in Illinois to do its book keeping job is also technically offshoring.
The difference between both forms does matter, with the new format of tax codes, off-shoring may become a little expensive for US companies, with the extent of the increase depending on the tax rates of the country the jobs go to. In some of European countries, the tax rate for foreign companies is as less as 12% whereas in India it is 44%, way higher than United States.

he change, as best as I can understand from the opinions of tax experts in United States and India, will reverse a Bush-era policy where US companies were able to "defer" paying corporate tax on income earned overseas until they brought it back to the US, either as dividends or as retained profits on their balance sheets. They got a tax credit for whatever tax they paid overseas already, and paid the difference to the US Government.

Now, if the change goes through, US companies must pay US corporate tax immediately, but will continue to get that credit. Keeping in mind that companies spend a lot of money figuring out loopholes and deductions to keep their tax rate low, the difference between US and Indian corporate tax rates is pretty low already, no more than a few percentage points.

So, the off shore companies get their work done outside United States and the amount they pay in India is very lesser than that they pay in United States. The profit they make through this difference is much higher than the tax they pay to the United States government.
As far as outsourcing goes, which arguably has resulted in a large number of jobs being created in India instead of the US, the impact is even less. The US subsidiaries of Indian companies like Infosys or TCS do have some earnings in the US or from non-India based operations but the bulk of the earnings, which add up to billions of dollars a year, are generated in India. So far, there is nothing in the Obama budget or even any clear policy that affects Indian companies directly.

So, the Indian companies, which serve as the first step of outsourcing for US companies are waiting to see what is Obama’s next move and till then, they still have a bit of relief since the tax rates are in control and the US companies do not defer from outsourcing their jobs.

Well.. any comments you have…., feel free to voice your opinion. If you like this article, share it.

Images Courtesy: Google.



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