Author: Khozem Merchant in Mumbai
Publication: Financial Times
Date: January 25, 2004
India's technology industry has
attacked proposed new US legislation that bans the outsourcing of federal
work to low cost countries arguing it is a protectionist measure contrary
to the spirit of free trade.
The move by the US Senate coincides
with decisions by a number of foreign companies to halt further outsourcing
to India because of a new domestic tax ruling that would enable the Indian
government to tax part of their worldwide earnings.
The US bill, which was passed by
the Senate of Friday but has still to be signed by President George W.
Bush before it becomes law, is the most significant attempt to stop outsourcing,
a fast-growing industry trend that has led to the loss of thousands of
highly-paid technology jobs in the US and become a hot political issue
in a US election year.
Although US federal contracts account
for only 2 per cent of India's IT earnings, the bill sends a worrying message
to the Indian outsourcing industry, which has been lobbying hard to stave
off protectionism.
Arun Shourie, Indian's information
technology minister, said the bill damaged the outlook for talks on freer
multilateral trade. Kiran Karnik, president of Nasscom, the umbrella body
for Indian IT, said he "hoped wiser counsel would prevail" before the law
was enacted.
The revenues from India's technology
industry are forecast to expand by a third to $15.5bn in the year to March,
with two-thirds of the growth coming from the US, as more companies in
North America and elsewhere leverage India's high IT skills and low costs.
But US companies such as JP Morgan
and General Electric, which have outsourced thousands of jobs to India,
could be casualties of the controversial rule on the taxable status of
foreign companies' outsourced units. This week Nasscom said three unidentified
foreign companies with back office operations in India had frozen future
outsourcing until "there was clarity".
The government circular, which is
binding on the tax-collecting authorities, says a foreign company's global
income would be taxable under India's double-tax treaties if that company's
outsourced unit in India carries out "core revenue-generating activities."
Non-core activities conducted at arm's length and at fair market value
would be exempt.
Accountants say the ruling introduces
artificial distinctions between core and non-core work. "This raises technical
ambiguities that could lead to litigation," said one tax expert.
Experts say an accepted principle
of global accounting norms is that double-tax treaties override domestic
tax regulations. Foreign companies could therefore appeal to double tax
pacts, which prevent the imposition of taxes from different countries on
the same business, to circumvent the circular.
Nasscom has protested to the Indian
government, arguing the measure is contrary to the government's tax-friendly
stance towards a nascent, job-creating industry.
