Do the new US Tax implications affect Outsourcing?

Taxes are always a major factor that cut into the profit margin of any business. So how do the latest tax implications affect outsourcing? Read on to find out…

The Government of India has announced a new tax rule for US businesses which have moved their software development, customer service, and research and development work to India. According to this rule, foreign companies which have their captive operations based in India will have to pay tax to the Government of India. However, this tax amount paid in India could be deducted (under reciprocal tax agreements) from the amounts due for those firms in the countries of their origin.

This move will only serve to affect the outsourcing businesses in a positive manner. When captive business operations of a foreign company are taxed, the business will be driven towards the domestic companies.

Thus, in the long run, it will only impact the domestic outsourcing business in a favorable manner. In short, those domestic companies that are providing outsourcing services for sectors such as customer support and software development will now attract more foreign companies as their clients. Naturally, this will also prove to be beneficial for different knowledge process outsourcing companies (KPOs) which provide several other knowledge based services.

In the meantime, a new tax plan waits to become law by the year 2011 in the US. According to this proposed legislation, tax loopholes which allow US companies to send jobs overseas will be closed. This will force these companies to bring several of their customer service based operations back to the US.

Again, this legislation will not pose a threat to the domestic knowledge process outsourcing jobs based in India. These are specialized services and as such do not fall within the purview of this legislation.

This situation does show that both these countries respect the fact that outsourcing is creating a very inter-dependent economy - which will inevitably lead to combined growth. However, this trend of taxation reforms implemented by both these countries also understand the implicit need for creating jobs for their citizens in their own countries. A long term analysis of this situation will show that although there may be some cases of loss of business, the situation will balance itself out over time, leading to an increase in the number of jobs available - in both the countries.

Overall, although the new tax legislations may eat into the profit margins of the companies, it will only serve to help drive the knowledge based outsourcing businesses towards the domestically based and established operations and organizations in India. Hence, these tax implications will not affect the outsourcing business revenues generated in India.