U.S. tax plan seen not hurting Indian outsourcers

Engineers attend to calls from abroad inside a call center in Gurgaon, New Delhi December 3, 2003. U.S. plans to scrap tax incentives that encourages American firms to ship jobs overseas are unlikely to dent business for Indian outsourcers, but the move is protectionist, company officials and lobby groups said.

BANGALORE (Reuters) - U.S. plans to scrap tax incentives that encourage American firms to ship jobs overseas are unlikely to dent business for Indian outsourcers, but the move is protectionist, company officials and lobby groups said.

The proposal, if implemented, will hurt more U.S.-based companies that have significant operations overseas, including in India, they said on Tuesday.

U.S. President Barack Obama plans to tighten rules allowing companies to defer paying taxes on profits made overseas as long as those earnings are ploughed back into the foreign subsidiaries, he said on Monday.

Supporters of the tax reform plan say the existing provision allows U.S. companies to avoid taxation indefinitely and gives them incentives to create jobs overseas instead of at home.

"This may actually end up reducing competitiveness of U.S. companies with global operations when compared to their European and Japanese counterparts," National Association of Software and Service Companies (Nasscom), an Indian lobby group, said.

"It is important to note that most large American companies have more than 50 percent of their revenues coming from markets outside the U.S. and (they) would be affected by the proposed tax reforms, if implemented," it said in a statement.

Indian outsourcers such as Tata Consultancy Services and Infosys Technologies get half their revenue from the United States by providing a range of IT services to firms such as Citibank and General Electric.

Business groups in the United States have criticized Obama's plans saying it would make companies less competitive, but officials called the changes long-overdue fixes to curb abuses.

Bangalore-based Infosys, India's No. 2 software services exporter, said the proposal, if implemented, was unlikely to reverse the outsourcing of a gamut of services by U.S. firms to Indian companies.

"The current proposal, as we understand, is to close corporate tax loopholes on U.S. multinational corporations and crack down on their overseas tax havens," the company said in a statement.

"We do not believe that it has anything to do with IT outsourcing done by U.S. corporations."

Outsourcing is big business in India, where English-speaking and skilled workers cost about a fifth of their U.S. counterparts. The $60-billion export-driven industry employs about 2 million people.

Lured by the vast pool of cheaper and qualified workforce, global technology giants like IBM, Accenture and Microsoft have expanded their operations in India at a scorching pace in the last few years.

IBM employs more than 70,000 people in India, which is also a growing market for its services.

RETROGRADE STEP

The steady flow of jobs and services to low-cost centres such as India has been a hot-button issue in the United States, and analysts said it was likely to remain under the spotlight as the country struggles to revive its economy and stem job losses.

The Federation of Indian Chambers of Commerce and Industry termed the tax reform plan as a "retrograde" step, and said the move would have some impact on U.S. investments abroad including in India.

Sajjan Jindal, president of the Associated Chambers of Commerce and Industry of India, said the United States should not deny tax incentives to the American firms that create jobs overseas as that would send a wrong signal to the world.

"Not only America but the entire world has become the victim of current meltdown and at this crucial juncture taking resort to protectionism tendencies will kill the spirit of competition and dilute spirits of World Trade Organisation," he said. Shares in Infosys ended down 2.8 percent at 1,582.95 rupees and top exporter Tata Consultancy fell 2.5 percent to 650.45 rupees in the main Mumbai market that ended little changed.