A new legislative proposal in the US, which seeks to impose an additional tax burden on companies that outsource jobs overseas, has added a fresh layer of uncertainty for India’s information technology (IT) services sector. The move could weaken two of the sector’s biggest strengths — healthy order inflows and pricing stability.
The Bill, tabled by a Republican senator, is yet to become a law, but even in its current form, it raises the prospect that US enterprises — the single-largest customer base for Indian IT majors — may revisit their technology budgets. Any such reconsideration could slow the momentum of contract closures.
“There is already a lot of business uncertainty which is making clients tighten their purse strings. While the Bill is being discussed, they would not want to commit budgets which may add to their tax burden,” an industry expert said.
Long-term contracts
The deals that do get signed are likely to be long-term contracts, with discounting in the near term. “All IT companies will look to secure deals, as is evident from their order books. However, they will ask for long-term commitment to ensure that when things get better, the deals can be ramped up. As a result, margins of IT companies may come under further pressure,” Pareekh Jain, chief executive of EIIRTrend, a tech-focused information platform, said.
Another fallout of the development could be that US clients ramp down deals temporarily as they wait for clarity on the Bill.
Sharper pricing negotiations
This, in turn, could raise the possibility of sharper pricing negotiations. The backdrop is already tough. Clients have pivoted to cost-optimisation projects, prioritising “run” over “change” spending, and are extracting concessions from vendors. At the same time, the rapid adoption of generative AI has enabled enterprises to demand that productivity improvements be priced into contracts, effectively pushing down vendor realisations.
If an outsourcing tax is introduced on top of these pressures, clients are likely to look for ways to offset the incremental cost. The most direct way would be to seek lower billing rates or smaller deal sizes from their Indian partners, say experts.