India Economy

US BEAT will impact Indian IT sector

Rakesh Nangia | Updated on April 01, 2018

Offshore IT delivery may not remain that attractive for US corporations

Keeping its election promise to bring jobs back to the US, the Trump government has slashed the corporate tax rate in America from 35 to 21 per cent and has also imposed alternative minimum tax of 5/10 per cent under Base Erosion Anti-Abuse Tax or (BEAT) regime.

Implications for India

The alternative minimum tax under BEAT provides that US outsourcing corporations having foreign related-party payments in excess of a certain threshold, with an average annual turnover of $500 million or more for preceding three taxable years are required to pay 5 per cent tax during 2018 and 10 per cent thereafter on their revenues (only certain expense is allowed to be deducted while computing the revenue).

This 5/10 per cent tax under the BEAT regime is in fact a minimum alternative tax, liable to be paid only if the regular tax is lower than the 5/10 per cent minimum tax.

The Indian Information technology and business process management industry till date, as we all know, was highly dependent on US corporations offshoring the work to be conducted from India.

This was primarily owing to the fact that India offers a 25-30 per cent cost savings. The profit margins could also be as high as 40 per cent. After the recent move, offshore IT delivery may not remain that attractive for US corporations.

Moreover, reduced corporate tax rate and BEAT in the US will surely impact US tech giants opening their R&D centres in India.

Besides, this alternative minimum tax will also impact Indian MNCs having US subsidiaries.

This tax is also applicable to non-US corporations that derive US business income through subsidiaries or those who have a permanent US establishment, i.e. a taxable presence in the US. The respite that the non-US corporations have is that only their turnover from US business will be considered while determining whether such entity meets the threshold of $500 million.

This implies that the giants like Infosys, TCS, Wipro, Tech Mahindra etc. or the companies earning this level of income will primarily get impacted.

Interestingly, most Indian companies having US subsidiaries employ local resources to either pursue deals or engineers who deliver work onshore with clients.

Owing to a clear shortage of over one million engineers in the US, Indian IT companies will have no choice but to rely on the large workforce in India.

Hence, despite the higher tax cost, clients who look at clear benefits of delivering projects faster at lower costs could eventually just factor in the taxes in their deals with Indian firms.

Undoubtedly, the continued administrative actions in the US may collectively add up to a series of negatives.

All these actions are now a part of business in a global industry which is dealing with de-globalisation. The IT industry is set to face a rising wave of protectionist tendencies in key markets globally.

As artificial intelligence and machine learning drive the march of automation, it becomes even more critical for India to be ready with its digital workforce.

The only ray of hope lies in becoming far more competitive and skilled.

Eventually, tax is just a cost which can be factored in but talent is not replaceable.

The writer is Managing Partner, Nangia & Co LLP. With inputs from Neha Malhotra, Executive Director

Published on April 01, 2018

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