Donald Trump's protectionist taxes to hurt tech sector in India and US

The double impact of base-erosion and anti-abuse tax (BEAT) introduced by the US government and the lowering of corporate taxes to 21 per cent are feared to have negative impact on the Indian arms of global technology companies.

Part of President Donald Trump’s plan to create more jobs in the US by stopping them to move to offshore locations, BEAT which became effective from January this year, calls for a review of the outsourcing models of large US companies (above $500 million in turnover). Though currently the tax rate for this is 5 per cent, it is expected to double to 10 per cent next year as the US administration tries to close in on the amount works that are being offshored.

“Basis analysis of some of the leading IT companies that outsource a large part of their R&D works to India, BEAT could have an effect of wiping out the benefit of headline tax rate reduction,” said Fatema Hunaid, Partner, Grant Thornton India LLP. The tax largely offsets the benefit headline corporate tax rate reduction for companies that outsource and a review and restructuring of the outsourcing models adopted in good time, she added. “Yet, while the industry is pausing to review, I believe this new tax policy does not take away from the sheen off the inherent advantages of outsourcing to India largely owing to the talent pool and cost arbitrage.”

The increasingly protectionist policies of the Donald Trump government are impacting Indian businesses on all fronts. Industry watchers are now concerned that while there is already an increased scrutiny on visa applications which is resulting in rejection rates, the next big impact will be for the US-based tech giants who have successfully used India for setting up large captive operations or global in-house centres (GICs).

Further, the revision of the corporate tax from 35 to 21 per cent is aimed at ensuring profits from the non-US based centres is routed back to the country. The problem here being that, at least for the technology giants, India is the next largest business generator and consequently, will be the worst affected by these policies.

“This (BEAT) is likely to have a significant overall impact on Indian IT companies as well as on the captives, who were transforming themselves into GICs. Indian MNCs will now have to explore new ways of doing business, as the impact of these changes are significant,” said D D Mishra, Research Director, Gartner.

While it is too early to comment on how Indian IT Industry will react to it but in the long run, it’s going to be painful for the US companies as it will reduce their competitive edge and also it may create a demand and supply gap in the US, Mishra added.

Between 2010 and 2016, number of global companies having R&D centres in India grew from 721 to 943, according to data from Indian Brand Equity Foundation (IBEF). The workforce employed by these centres is estimated to have jumped from 204,000 in 2010 to 387,000 last year. The report expected the workforce in global R&D centres in India to reach a massive 508,000 by 2020. More than 40 per cent of the global 500 R&D spenders are based out of India, said the report.

Not just technology behemoths like Microsoft, Apple, Google and IBM but the every other large technology player has a presence in India nowadays due to the availability of large pool of talent in the country.

Most businesses started their presence in India with basic outsourcing jobs related to coding and maintenance, but have gradually upgraded to build larger operation centres in the country supported by the large talent pool. The final step was usually setting of large innovation centres leveraging the talent base in India creating products for global markets as China which has similar demographics like India still remains a closed market.

According to World Economic Forum’s Competitiveness report 2017, tax rates, tax regulations and restrictive labour regulations are among the top concerns for business in the US.