New tax reforms proposed in US to check outsourcing

February 27, 2012: In an effort to control outsourcing by US companies, the United States President Barack Obama has proposed to introduce tax on earnings made outside the country. This move is to discourage the large US companies from offshoring jobs to destinations such as India.

The proposed reform will make it difficult for the companies in the United States to outsource their business processes. The reform includes provisions to provide incentives to companies that will return jobs back to the US.

The proposed reforms is a part of the bigger tax plan that is a major factor in the election manifesto and this gains importance when the unemployment rate in the United States is going high. The US treasury department says that the tax system in the country contributes very little in creating jobs and encouraging investment within the United States. It says that the tax system on the other hand offers opportunities to the US companies to offshore jobs and to earn profits.

The new tax plan will not make the US firms that outsource work eligible for tax deductions. Rather, the proposed tax plan will offer a 20 per cent income tax credit on the expenses incurred on transferring the work back to US. The US President observed that the present corporate tax system in the country is outdated and inefficient. It is said that shifting of profits to other countries is reducing the quantum of the US tax base and will result in decline in the corporate tax receipts.

However the Indian Information Technology (IT) and Business Process Outsourcing Industry are not worried with the move by the US government. Now they have realized that the companies from the US do not outsource their jobs for cost reduction alone, but they have other advantages too. The US companies have realized that they have a big market here in India. So the outsourcing industry in India strongly believes that they will consider their interest in the Indian market before taking any decisions on tax reforms.

The ongoing economic slowdown is not going to affect the demand for outsourcing services and it is evident that the service providers in India are on their way to move up the value chain. Though it is too early to make any comments on the outcome of such a reform, it is generally believed that proposed tax reforms will not make a huge impact on the Indian outsourcing industry.




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