NEW DELHI: The Indian IT sector is facing a new challenge as the United States considers imposing a 25% outsourcing tax on services provided by foreign firms. A new bill, the Halting International Relocation of Employment Act (HIRE Act), has been introduced in the US Senate by Senator Bernie Moreno. The proposal, if passed, could make India’s IT services exports—worth over $225 billion in 2024-25—significantly more expensive for American companies, potentially impacting India’s largest services export market.
The HIRE Act Explained
The HIRE Act aims to impose a 25% tax on certain payments made by US taxpayers to foreign service providers if those services directly or indirectly benefit American consumers. This includes fees, premiums, royalties, and service charges paid in the course of business to foreign persons.
For services that benefit consumers both inside and outside the US, the tax will apply proportionally to the portion directed toward US consumers. The bill also allows the US Treasury to demand reporting from companies making such payments, and imposes severe penalties for non-compliance—raising failure penalties from 0.5% to 50% per month without the existing aggregate cap.
Crucially, this tax amount will not be deductible from US taxpayers’ income, meaning companies would directly bear the increased cost.
Political Rationale Behind the Move
Senator Bernie Moreno, who sponsored the bill, argued that US corporations and political leaders have for decades outsourced well-paying jobs to countries like India in pursuit of cheaper labor. He emphasized that the outsourcing tax would ensure American workers get priority in employment.
“While college grads in America struggle to find work, globalist politicians and executives have shipped jobs overseas. Those days are over,” Moreno said. “If companies want to hire foreign workers instead of Americans, my bill will hit them where it hurts: their pocketbooks.”
This narrative aligns with previous calls from far-right US voices like commentator Jack Posobiec, who urged tariffs on foreign remote workers. His view—that outsourcing should be taxed like imported goods—was even shared by former US President Donald Trump’s trade advisor, Peter Navarro.
Why the Indian IT Sector is Concerned
The United States is India’s single largest market for IT services, accounting for more than half of the total industry exports. Any increase in service costs due to the outsourcing tax could discourage American firms from engaging Indian IT companies, thereby reducing demand.
Industry experts note that while large IT players like TCS, Infosys, and Wipro may have some capacity to absorb costs or renegotiate contracts, smaller firms and startups relying heavily on offshore contracts could face margin pressures.
Further, this move comes at a time when the Indian IT sector is already navigating global economic uncertainty, automation trends, and competition from other outsourcing hubs like the Philippines and Eastern Europe.
Key Provisions of the HIRE Act
Tax Scope: Applies to outsourcing payments made for services benefiting US consumers.
Rate: 25% tax on payments.
Definition: A “foreign person” includes all non-US entities, except corporations/partnerships in US territories.
Compliance: US Treasury can require mandatory filings from companies making such payments.
Penalties: Failure to comply will attract a massive 50% monthly penalty, far higher than current rules.
Non-Deductible: The outsourcing tax cannot be deducted from taxable income of US companies.
Creation of the Domestic Workforce Fund
The bill also proposes setting up a Domestic Workforce Fund within the US Treasury. Revenue collected from the outsourcing tax and related penalties will be channelled into this fund.
The fund will support:
Workforce retraining programs.
Apprenticeships.
Grants to states with high job displacement rates.
Programs administered by the US Department of Labor to strengthen the domestic workforce.
By directing funds toward upskilling Americans, the bill intends to counter the negative effects of decades of offshoring.
Timeline and Implementation
If passed, the HIRE Act will apply to payments made after December 31, 2025. This provides US companies and foreign IT service providers about a year to prepare for the new tax regime. However, uncertainty around US elections and economic priorities means the bill could still face amendments or opposition before implementation.
Global and Domestic Repercussions
For the US: While the tax could make American labor relatively cheaper, it may also increase operational costs for companies dependent on offshore talent. Sectors like finance, healthcare, and technology, which rely heavily on Indian IT services, could face higher costs.
For India: The Indian IT sector could see slower export growth and pressure on service pricing. The long-term impact may force Indian IT companies to expand beyond the US market, seeking greater opportunities in Europe, Asia-Pacific, and the Middle East.
For Employees: Indian IT professionals deployed onsite in the US might also face indirect consequences if American companies reduce outsourcing deals.
Industry Reaction
While there has been no official statement from Indian IT giants yet, industry insiders suggest lobbying efforts may intensify at diplomatic and trade levels. India has consistently maintained that outsourcing provides a win-win situation, helping US companies lower costs while creating efficiency gains.
Additionally, business leaders fear the bill could set a precedent for other countries to impose similar restrictions, further squeezing the global outsourcing model.
Conclusion
The HIRE Act marks a significant escalation in the outsourcing debate, putting the Indian IT sector on high alert. While the stated aim is to protect American jobs, the ripple effects could extend globally, reshaping trade dynamics in the services industry. With over $225 billion at stake, the coming months will be critical for policymakers, industry leaders, and governments to negotiate a balanced approach.
