Who's scared of Obama? Not Indian IT for sure

Bangalore: Indian IT and IT-services companies seem undaunted by the potential impact from US President-elect Barack Obama's proposal to repeal tax breaks for companies that outsource certain operations to offshore centers.

"I don't see Obama doing anything terribly drastic. I think he has enough on his plate; he has got a trillion-dollar bailout and probably got another trillion dollars coming on top of that which he has to finance," Genpact Ltd's Chief Executive Pramod Bhasin said at the Reuters India Investment Summit.

Obama's tax plans are unlikely to affect the outsourcing industry because of the scarcity of IT talent in the United States, Suresh Senapaty, chief financial officer of Wipro Ltd, told the summit, held at Reuters Bangalore office.

Over the past few years, IT-services firms armed with competitive, English-speaking professionals working for relatively cheap wages have cashed in on an outsourcing boom. But they are now experiencing a lull in growth as the US economy faces one of the worst crises in history.

Obama's plans to encourage US firms to keep jobs in the country have raised concerns that Indian IT-services firms could lose out as more services are retained in the United States.

"Barack Obama will repeal tax breaks that reward corporations that retain their earnings overseas, and will use those savings to lower corporate tax rates for companies that expand or start operations in the United States," according to Obama's website, www.barackobama.com.

With unemployment rates in the United States rising and Wall Street giants collapsing, merging or rushing to chop their workforces to mitigate costs, Obama faces growing political pressure to keep jobs at home.

But IT industry experts concur with the view of Indian firms that the policies of Obama, who will be the first African-American president of the United States, may not be so taxing after all.

Currently, the US Internal Revenue Code allows corporations to offset losses in overseas jurisdictions against profits made in the United States, analysts Kishore Belai and Shashi Bhusan of Macquarie Research Equities said in a research report earlier this month. The code also allows companies operating through subsidiaries overseas not to pay taxes on profits made by the units unless those profits are directed back to the United States, they said.

The tax plan proposed by Obama, who will be sworn in as president on Jan. 20, seeks to revoke this benefit. "Such provisions may have the perverse effect of making US companies uncompetitive in overseas markets rather than deterring offshoring," the Macquarie analysts said. Indian IT-services companies like Infosys, Wipro and Tata Consultancy Services Ltd could get an edge over US companies such as Cognizant and IBM, they said. The India-domiciled companies will continue to pay lower taxes, while Cognizant and IBM will have to pay out more, the analysts said.

"It is not very tangible because he (Obama) cannot dictate what companies do or do not do," Avinash Vashistha, CEO of Tholons, an investment advisory and management consultant firm, told Reuters. Vashistha said it would be easier for Obama to control jobs that are going offshore in the manufacturing sectors such as textiles and autos.

"But as far as the (IT and BPO) services jobs are concerned, we expect no changes," he said. Chaitanya Ramalingegowda, the director of advisory services at Zinnov Management Consulting Pvt Ltd, believes companies probably need to adopt a "wait and watch" policy to see how many of Obama's tax plans are actually implemented.

"These are uncertain times. You can't really make some very insightful statements. We are closely watching the situation," Anantha Radhakrishnan, a vice president at Infosys BPO, said at the summit. But currently, he does not expect to see any fundamental changes in the outsourcing environment due to Obama's plans.

Zinnov's Ramalingegowda said, "On the one hand (Obama) has said he is going to take away some of the tax breaks, and on the other hand he has said, very categorically, that the trend of outsourcing cannot be reversed."