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Many big-name US companies rely on Indian outsourcing

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Bill tabled to tax US firms hiring overseas staff over

Americans

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Deliberations could prompt firms to delay signing IT

contracts

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Firms set to lobby against bill, take legal action,

experts say

By Haripriya Suresh and Urvi Dugar

BENGALURU, Sept 11 (Reuters) - India's massive IT sector

faces a lengthy period of uncertainty with customers delaying or

re-negotiating contracts while the U.S. debates a proposed 25%

tax on American firms using foreign outsourcing services,

analysts and lawyers said.

The sector is likely to be on the receiving end of a bill

which, though unlikely to pass in its nascent form, will

initiate a gradual shift in how big-name firms in the world's

largest outsourcing market buy IT services, they said.

Still, with U.S. firms having to pay the tax, those

heavily reliant on overseas IT services are likely to push back,

setting the stage for extensive lobbying and legal battles,

analysts and lawyers said.

India's $283 billion information technology sector has

thrived for more than three decades exporting software services,

with prominent clients including Apple ( AAPL ), American

Express ( AXP ), Cisco ( CSCO ), Citigroup ( C/PN ), FedEx ( FDX )

and Home Depot ( HD ). It has grown to make up over 7% of GDP.

However, it has also drawn criticism in customer countries

over job loss to lower-cost workers in India.

Last week, U.S. Republican Senator Bernie Moreno introduced

the HIRE Act which proposes taxing companies that hire foreign

workers over Americans, with the tax revenue used for U.S.

workforce development. The bill also seeks to bar firms from

claiming outsourcing payments as tax-deductible expenses.

The bill could not have come at a worse time for India's IT

sector, which is struggling with weak revenue growth in its

mainstay U.S. market as clients defer non-essential tech

spending amid inflationary pressure and tariff uncertainty.

"The HIRE Act proposes sweeping changes that could alter the

economics of outsourcing and significantly increase the tax

liability associated with international service contracts," EY

India's compliance head Jignesh Thakkar said.

In some cases, combined federal, state and local taxes could

push the levy on outsourced payments as high as 60%, Thakkar

said.

"While its partisan proposal may seem initially attractive,

it's ultimately an artificial cost which makes organisations

less competitive and profitable globally," said Arun Prabhu,

partner at Cyril Amarchand Mangaldas.

Even so, the idea is gaining traction. This month, White

House trade adviser Peter Navarro reposted a call from far-right

activist Jack Posobiec for tariffs on services, not just goods.

"When political noise turns into regulatory risk, clients

quickly insert contingencies, reopen pricing and demand delivery

flexibility," said HFS Research President Saurabh Gupta.

"Clients will simply take longer to sign, longer to renew,

and longer to commit transformation dollars," Gupta said.

Industry body Nasscom and IT firms Tata Consultancy Services

, Infosys, HCLTech, Tech Mahindra

, Wipro and LTIMindtree did not

respond to requests for comment on implications of the bill.

BACKLASH BECKONS

Companies are likely to lobby hard against the proposed bill

and challenge it legally if passed, legal experts and industry

watchers said.

"A bill like this would probably face a lot of backlash from

U.S. companies that rely heavily on outsourcing, who would

likely bring litigation to challenge various aspects of the

bill, if it were ever to be passed into law," said Alcorn

Immigration Law CEO Sophie Alcorn.

Sweeping restrictions are unlikely given the practical

hurdles in enforcing the bill's provisions, experts said.

"More likely is a diluted version, with narrower provisions

or delayed enforcement," said HFS Research CEO Phil Fersht.

The bill could also affect U.S. firms' global capability

centres (GCCs), which have evolved from low-cost offshore back

offices to high-value innovation hubs that support operations,

finance, research and development.

"It will be hard to pull back from existing work, but new

set-ups and expansion may get impacted," said Everest Group

partner Yugal Joshi.

The proposed tax will impact the cost arbitrage advantage

that is among the deciding factors when establishing a GCC, said

Bharath Reddy, a partner at CAM.

"However, the lack of availability of appropriate human

capital in the U.S. will continue as a problem, and which can be

addressed in the near future only through outsourcing," he said.