The Indian IT sector is on high alert following a proposal in the United States to impose a tax on outsourcing. This move has sparked considerable anxiety, as the US is a major market for Indian IT services, accounting for over 50% of India's software services exports, which amounted to around $225 billion in 2024-25.
The proposed legislation, known as the "Halting International Relocation of Employment Act" (HIRE Act), suggests a 25% tax on payments made by US companies to foreign entities for services that ultimately benefit American consumers. Republican Senator Bernie Moreno introduced the bill. Moreno stated that the goal is to prioritize American workers and ensure they can "work and retire with dignity," arguing that companies choosing to hire foreign workers should face financial consequences. Revenues from the outsourcing tax will be used to fund apprenticeship programs and workforce development in the US.
The HIRE Act targets "outsourcing payments," encompassing any premium, fee, royalty, or service charge paid to a foreign entity for labor or services directed towards US consumers. If services benefit consumers both inside and outside the US, the tax would apply only to the portion of the payment corresponding to services for US consumers. The bill defines a "foreign person" as someone who is not a US person, excluding corporations or partnerships organized under the laws of a US possession. The Secretary of the Treasury would have the authority to require US persons to file returns regarding these payments. The penalty for failing to pay the tax could be a hefty 50% for each month of failure, without the usual 25% aggregate cap, and the tax would not be deductible from a US taxpayer's income.
Industry experts caution that the HIRE Act's passage could lead to reduced spending by US clients, who generate over 60% of India's IT outsourcing income. Legal experts like Rohit Jain suggest that the bill could significantly diminish the financial benefits of outsourcing to India, impacting new contract acquisitions, affecting profit margins, and compelling Indian IT companies to seek growth opportunities in markets beyond the United States.
The Indian IT sector is already facing existing pricing pressures, reduced deal activity due to cautious tech spending, and disruption from artificial intelligence. The proposed tax adds another layer of uncertainty, potentially weakening healthy order inflows and pricing stability. US enterprises, the single-largest customer base for Indian IT majors, may reconsider their technology budgets, slowing down contract closures. Deals that are signed are likely to be long-term contracts, potentially with discounting in the near term, which could further pressure the margins of IT companies. Some US clients might temporarily ramp down deals as they await clarity on the bill, potentially leading to sharper pricing negotiations.
The US-India technology corridor, has been a mutually beneficial partnership, is facing turbulence. The HIRE Act represents a growing protectionist sentiment in the US that Indian IT can no longer afford to ignore. While the bill's passage is not guaranteed, it signals rising protectionism and populist rhetoric. This situation necessitates that Indian IT firms consider diversifying their markets and focusing on domestic growth.
