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Obama's tax plan could push up outsourcing cost 50%
May, 06th 2009

American firms could see a 50% rise in the cost of outsourcing business processes to India if President Barack Obama's new tax proposals are accepted. Even though outsourcing will still make business sense, industry watchers concede the move could act as a dampener.

Obama has proposed to tax expenditure by US companies on availing services from outside the country from 2011. The move has been proposed to discourage outsourcing and contain the flight of jobs to other countries.

According to Uday Ved, head of global tax consultancy firm KPMG, payments by US companies for services outsourced to India or other countries are treated as normal expenditure and deducted from the company's revenue at present. They are not required to pay tax on that amount.

For example, if a company spends $100 on outsourcing, it will save about $35 as corporate tax, said Ved. So, net outgo of money will only be $65. However, if Obama's new tax proposal goes through, the company will not be able to save the $35. So the net outgo will be $100 instead of $65 - or 53.86% more than the present cost.

However, Aparup Sengupta, chief executive officer of BPO company Aegis, pointed out that American companies save 60%-75% by outsourcing their back office operations to countries like India. The savings are higher if high-end operations are outsourced.

Sengupta said that in general, a service which costs around $48 per seat per hour in the US is accomplished at $11-12 per seat per hour in India. So, US companies save almost 75% by outsourcing their activities to India. The savings in high-end BPO services are even higher as the fixed cost in all the cases remains the same and the only increment is the marginal increase in wages of trained manpower.

Besides the cost arbitrage, the availability of trained manpower will also be an issue in the US, said Sengupta. Particularly in the IT space, there is a shortage of talent in the US. So, regardless of whether the tax is levied or not, US companies will have to outsource to remain globally competitive.

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