The Indian Information technology (IT) and business process management (BPM) industry as we all knew till date was highly dependent on U.S. corporations offshoring the work to be conducted from India. This was primarily owing to the fact that India offers a 25-30 per cent cost savings to the U.S. Corporations offshoring the work to them. The cost saving offered by Indian IT-BPM industry is not only attributable to the low labour cost in India, but also the profit margins which can be as high as 40%.
Keeping his election promise to bring back jobs to US, Trump has tightened the leash on economics of the business model of the Indian IT-BPM Industry. A two pronged approach, by firstly slashing the corporate tax rate in America from 35% to 21% and secondly by imposing minimum alternate tax of 5/10 percent under Base Erosion Anti-Abuse Tax or (‘BEAT’) regime, the offshoring IT delivery may not remain that attractive for U.S. corporation. But can we completely disregard the large talent pool of India?
After slashing the corporate tax rate, the alternate minimum tax under BEAT regime provides that U.S. outsourcing corporations having foreign related-party payments in excess of certain threshold, with an average annual turnover of $500 million or more for preceding three-taxable- year are required to pay 5 percent tax during 2018 and 10 percent thereafter on their revenues (only certain expense is allowed to be deducted while computing the revenue). This 5/10 percent tax under the BEAT regime is in fact a minimum alternative tax, liable to be paid only if the regular tax is lower than the 5/10 percent minimum tax.
Reduced corporate tax rate and BEAT will surely impact the U.S. Tech Giants opening their R&D centres in India. But will this alternate minimum tax also impact the Indian MNCs having US subsidiaries?
This alternate minimum tax of 5 /10 percent is also applicable to non-U.S. corporations that derive U.S. business income through subsidiaries or those who have U.S. permanent establishment i.e. a taxable presence in U.S. The only respite that the non-U.S. corporations have is that only their turnover from U.S. business will be considered while determining whether such entity meets the threshold of $500 million. Meaning thereby only the giants like Infosys, TCS, Wipro, Tech Mahindra etc. or the companies earning this level of income will primarily get impacted.
Interestingly, most Indian companies having US subsidiaries employ local resources to either pursue deals or engineers who deliver work onshore with clients. Owing to a clear shortage of over one million engineers in the US, Indian IT companies will have no choice but to rely on the large workforce in India. Hence, despite the higher tax cost, clients who look at clear benefits of delivering projects faster at lower costs could eventually just factor in the taxes in their deals with Indian firms.
Undoubtedly, the continued small administrative actions in the U.S. which have been there may not have a big impact individually, but collectively they may add up to a series of negatives. All these actions are now a part of business in a global industry which is dealing with de-globalisation. The IT industry is set to face rising wave of protectionist tendencies in key markets globally.
As artificial intelligence and machine learning drive the march of automation, it become even more critical for India to be ready with its digital workforce. The only ray of hope of the Indian IT-BPM industry to become far more competitive and skilled. India needs to continue beating international competition with its focus on SKILLING, since the cost arbitrage owing to the talent pool of India can still outshine the tax impact.
Eventually, tax is just a cost which can be factored in but talent is not replaceable and companies would do whatever it may cost to continue its business.