The proposed Halting International Relocation of Employment (HIRE) Act in the U.S. has sent ripples of concern through India's $283-billion IT sector. Introduced by Republican Senator Bernie Moreno, the HIRE Act aims to discourage U.S. companies from outsourcing jobs overseas by imposing a 25% tax on payments made to foreign firms for outsourced work and eliminating the tax deductibility of such payments. This move reflects a growing protectionist sentiment in Washington, D.C., with proponents arguing that it will bring back American jobs.

India relies heavily on the U.S. for more than 50% of its total revenues from IT services. Experts warn that the new tax could increase outsourcing expenses by almost 46% when the elimination of deductions is factored in. Indian IT companies may have to absorb some or all of these costs, which would affect their profit margins. Alternatively, U.S. companies might pass the tax increase on to their clients, leading to higher service costs.

The HIRE Act's implications extend beyond immediate financial concerns. It could reduce the cost advantage that has driven outsourcing to India, potentially slowing down new contract acquisitions and squeezing profit margins. This may force Indian firms to explore growth opportunities in other markets.

Several strategies could be employed by U.S. companies in response to the HIRE Act. Some might suspend major contracts or seek modifications to existing agreements to mitigate the risks associated with the new tax policy. Others may increase local recruitment in the U.S. while reducing their reliance on overseas teams. Some clients may ask their IT service providers to absorb the tax impact by offering tax-inclusive pricing or reducing fees.

While advanced projects in areas like digital transformation and artificial intelligence might be less affected, the overall landscape for Indian IT firms could become more challenging. The HIRE Act also raises questions about the viability of existing workarounds, such as establishing subsidiary operations in India, as these arrangements may fall under anti-abusive sections of the bill.

The HIRE Act is not the first instance of the U.S. government seeking to protect domestic jobs. Former Trump advisor Peter Navarro and activist Laura Loomer have openly supported limits on outsourcing, often citing the Indian IT industry as an example. The current proposal exemplifies an increase in protectionist sentiment in Washington, D.C..

The World Trade Organization (WTO) has a long-standing agreement that prevents member nations from imposing duties on digital services. This moratorium has been renewed several times, most recently in early 2024, and is up for review again in March 2026. India had earlier withdrawn the equalisation levy on digital services as part of trade understandings with the U.S.

The HIRE Act highlights a changing political climate in the U.S. For an industry that has relied almost exclusively on American clients to date, this is a call to action to modify, move with the times and be less dependent on the US and American market before protectionist measures clamp down harder.

Some experts believe that most U.S. clients are likely to pause large-scale deals or renegotiate existing ones, or even shift part of the work closer to home to hedge against policy risks. Others could continue working with Indian firms but push harder for better terms, knowing suppliers are under pressure. Pricing pressure could intensify, particularly in commoditized IT services like application development and maintenance, though high-end digital transformation and AI-driven projects may be relatively shielded.