India’s IT Giants Face Uncertainty Over US Outsourcing Tax

A Sector Deeply Tied to the US

India’s information technology industry has been one of the country’s most visible global success stories. For over three decades, firms like Tata Consultancy Services (TCS), Infosys, Wipro, and HCLTech have provided critical software and outsourcing services to some of the biggest names in corporate America. From Apple and American Express to Cisco, Citigroup, FedEx and Home Depot, many US firms rely heavily on Indian expertise to maintain their operations. This partnership has not only built India’s $283 billion IT sector—contributing over 7% to the nation’s GDP—but also created a seamless flow of services across borders.

Now, that relationship faces a fresh challenge. A new US bill, the HIRE Act, seeks to impose steep taxes on companies that outsource work overseas instead of employing American workers. For India’s IT sector, already grappling with slowing demand, this development comes at a precarious time.

The HIRE Act: A Potential Game-Changer

Introduced by Republican Senator Bernie Moreno, the HIRE Act proposes a 25% tax on outsourcing. In practice, however, the combined impact of federal, state, and local levies could raise the effective rate on outsourced contracts to as high as 60%, according to tax experts.

The bill also aims to bar companies from deducting outsourcing expenses from their taxable income—a move that could substantially alter the economics of global service contracts. Supporters argue that the funds collected would be funneled into US workforce development, helping protect American jobs.

But industry leaders and analysts caution that such sweeping restrictions could disrupt business models, reduce global competitiveness, and trigger unintended costs for American companies themselves.

Industry Concerns: Contracts on Hold

For Indian IT firms, the uncertainty surrounding the bill is already being felt. Analysts note that American clients, wary of regulatory changes, are delaying signing new contracts or renegotiating existing ones. “When political noise turns into regulatory risk, clients quickly insert contingencies, reopen pricing, and demand delivery flexibility,” explained Saurabh Gupta, president of HFS Research.

In effect, deal-making is slowing down. Clients are taking longer to renew, longer to commit new transformation budgets, and longer to make large-scale outsourcing decisions. For an industry that depends heavily on long-term visibility, such delays pose a significant risk.

Legal Battles and Lobbying Ahead

Given how deeply ingrained outsourcing is in the US corporate ecosystem, experts believe the bill will face strong resistance. American companies with large outsourcing footprints are expected to lobby aggressively against the legislation, and if necessary, challenge it in court.

“A bill like this would probably face a lot of backlashes… U.S. companies that rely heavily on outsourcing would likely bring litigation to challenge various aspects of the bill, if it were ever to be passed into law,” said Sophie Alcorn, CEO of Alcorn Immigration Law.

Most observers expect a diluted version to eventually emerge—perhaps with narrower provisions or delayed enforcement—given the practical difficulties of implementing such sweeping restrictions.

Wider Implications: GCCs and Innovation Hubs

The fallout could extend beyond traditional outsourcing contracts. Over the last decade, many US multinationals have established Global Capability Centres (GCCs) in India. Once seen as low-cost back offices, these hubs now drive innovation, research, and product development.

If enacted in its strictest form, the HIRE Act could increase the cost of maintaining or expanding these centres. “It will be hard to pull back from existing work, but new set-ups and expansion may get impacted,” noted Yugal Joshi of Everest Group.

Yet the US still faces a shortage of skilled technology professionals, making it unlikely that domestic hiring alone can meet demand. As Bharath Reddy, a partner at Cyril Amarchand Mangaldas, observed, “The lack of availability of appropriate human capital in the U.S. will continue as a problem, which can be addressed in the near future only through outsourcing.”

Possible Pathways: Mitigation and Adaptation

While the bill may not pass in its current form, Indian IT firms cannot afford complacency. Several strategies are emerging:

·       Diversification of markets: Expanding into Europe, Asia-Pacific, and emerging economies to reduce dependence on the US.

·       Higher-value services: Shifting from cost-driven outsourcing to innovation-driven offerings such as AI, cloud transformation, and cybersecurity.

·       Strengthening local presence: Increasing hiring within the US and expanding onshore delivery centres to mitigate political risks.

·       Engaging policymakers: Through industry bodies like Nasscom, lobbying for a balanced approach that acknowledges global interdependence.

Balancing Politics and Global Business

The US HIRE Act underscores the growing political sensitivity around jobs, trade, and globalization. While framed as a measure to protect American workers, its unintended consequence could be to raise costs for US firms and strain a decades-old economic partnership with India’s IT industry.

For India, the challenge lies in navigating this uncertainty without losing momentum. The sector must adapt by diversifying, innovating, and forging stronger ties in alternative markets, while also working with policymakers in the US to demonstrate how outsourcing is not a zero-sum game but a driver of competitiveness.

Ultimately, the future of India’s IT sector will depend on its ability to remain indispensable—not just as a provider of low-cost services but as a global partner in innovation. In the long run, collaboration, not confrontation, will ensure that the benefits of technology and talent are shared across borders.

(With agency inputs)