US' proposed HIRE law puts Indian IT firms, GCCs in a fix: Experts

A proposed US law that imposes a 25 per cent tax on companies that outsource work threatens to upend the economics of Indian IT and global capability centres (GCCs).

 

According to industry and tax experts, US companies may see their tax burden surge by almost 60 per cent due to this.

 

If enacted from January 1, 2026, US companies would need to carefully reevaluate their global sourcing strategies. This is because the combined impact of excise, state, and local taxes could dramatically increase the cost of engaging foreign labour and services.

 

US Republican senator Bernie Moreno of Ohio introduced the Halting International Relocation of Employment (HIRE) Act, and the legislation — if passed — will impose a 25 per cent tax on any company that employs foreign labour instead of Americans.

 

It will use the generated revenue to fund workforce development programmes to help the US middle-class.

 

The Act defines outsourcing as any premium, fee, royalty, service charge, or other payment made by a US company or taxpayer to a foreign person with respect to labour or services the benefit of which is directed, directly or indirectly, to consumers located in the United States.

 

Jignesh Thakkar, global compliance solutions leader at EY India, shared that when combined with applicable state and local taxes, the overall tax burden could reach as much as 60 per cent on outsourced payments.

 

“For companies outsourcing services internationally, the financial impact could be substantial. For example, a US company making a $100 payment for IT services sourced from abroad would face a 25 per cent excise tax on the transaction. Moreover, the payment and the associated excise tax would both be non-deductible for corporate tax purposes, potentially raising the loss of federal and state corporate tax deduction on outsourcing payments up to around 31 per cent,” said Thakkar.

 

Experts say this is essentially an excise tax and not a corporate income tax and will be only applicable on services that are used by US customers.

 

However, according to the Act, this is not a deductible expense in the books which could be a double whammy for US companies.

 

Ganesh Natarajan, chairman of GTT Data Solutions and former chairman of Nasscom, said, "Taxing digital services under traditional frameworks is complex and often impractical. Any such move risks discouraging innovation and weakening global collaboration rather than strengthening domestic capabilities. Indian IT remains resilient and well-positioned to adapt through diversification, innovation, and artificial intelligence (AI)-driven transformation.”

 

Natarajan, who has also been CEO of midcap IT services firm Zensar, added, “While the proposed HIRE Act has triggered concern, I find it very unlikely that it can come to a vote and subsequently pass in the US Senate. The first resistance will come from American corporations themselves, given their deep investments in India, with Indian partners and the 1,600+ GCCs they operate here."

 

“The sentiment is very charged up in the US, given the whole outsourcing expansion over the years and now with so many GCCs grown in size and scale. Given that, it is difficult to imagine a harsh tax like this could be imposed on something that is critical for US companies. It is not easy to replace outsourcing and hire back in the US as the cost arbitrage will not be there. I think there will be strong lobbying within US companies to ensure that this is not good for US businesses,” a senior tax partner from a Big 4 auditor said.

 

And worse, this can also negatively impact India’s GCC industry — the new jewel in the country’s tech landscape. Companies may have to reduce the volume of work from its centres of excellence in Bengaluru or Hyderabad.

 

The centres in the Indian cities, which mostly are offshoots of US companies, could be treated like outsourcing hubs under the Act’s definition.

 

Sunil Padmanabh, an industry influencer and digital strategist, said that if this were to become law, the cost edge that GCCs enjoyed would come under threat.

 

 “A 25 per cent outsourcing tax could cut GCC savings for US firms from 50 per cent to barely 15-20 per cent,” he cautioned.

 

The GCCs likely to get hit the worst would be banking, financial services and insurance (BFSI), retail/e-commerce, and tech support space.

 

Healthcare ops and marketing analytics may see medium impact and engineering, research and development (R&D), and global corporate functions would be least exposed.

 

Job losses will eventually follow if the flow of work dries up.

 

Priyank Kharge, Karnataka’s minister of Information technology & biotechnology and rural development & panchayat raj, said the introduction of the Act has been “bothering” him too. The state houses about 35 per cent GCCs in India and nearly 60 per cent of those are US enterprises

  However, everybody cautioned that it will be difficult as India provides talent at a scale, which will be impossible to find in the US because of the cost and margins involved.

 

Padmanabh added, “With 76 per cent of US employers short of digital talent, companies cannot simply move all the work back to the US.”

 

“It is too early to say anything. So, we will have to wait and see if it will be done. The dependence of various geographical entities is way too much on the talent we have here and trillions of dollars that are invested in India. I don’t think any knee jerk reaction will happen but if it does, the industry is ready to brace for it because they have created offshore entities here as well. I don’t think it should have an impact and I don’t think the order is coming anytime soon,” the minister said on Tuesday.

 

This could not have come at a worse time because the IT companies are already under pressure for low single-digit growth for two consecutive years due to weak macroeconomic environment and impact of tariffs which have robbed wind off the sails of manufacturing and retail industries. The US is one of the largest markets for IT outsourcing and for Indian players it is the region contributing the highest to their revenues. 

What the Bill proposes

 

• 25% tax on any firm that employs foreign labour instead of Americans
• No deduction allowed for any outsourcing payment
• Will use generated revenue to fund workforce development programs in the US
• Likely to be enacted on January 1, 2026

 

Concerns for India

 

• India’s GCC industry can be negatively impacted
• Industry experts say 25% outsourcing tax could cut GCC savings for US firms
• GCCs in BFSI, retail/ecommerce, and tech support likely to be hit the worst
• Experts caution that it will be difficult, as India provides talent at a scale that will be impossible to find in the US