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Obama move to end tax breaks not aimed at India
September, 10th 2010

Striking a harsh note ahead of his visit to India in November, US president Barack Obama raised the outsourcing bogey again, stressing that he would end "tax breaks" for companies that "create jobs and profits in other countries." It's not music to Indian ears particularly as both countries are preparing for the presidential visit, and immediately attracted sharp reactions from the Indian government and business.

"One of the keys to job creation is to encourage companies to invest more in the United States. But for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries," Obama said in his speech on economy at Cleveland, Ohio. It may be great for domestic politics in the US, but for India it's poor timing.

The president said he was determined to change the way tax worked. "I want to change that. Instead of tax loopholes that incentivize investment in overseas jobs, I'm proposing a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do right here in America," Obama said, with Ohio governor Ted Strickland standing by his side.

"I think if we're going to give tax breaks to companies, they should go to companies that create jobs in America -- not those that create jobs overseas," Obama said.

Though the issue of tax breaks does not affect India, where corporate tax rates are higher than in the US, the populist protectionism can impact on the atmospherics of Obama's visit. Obama's remarks were read along with the sudden spike in attack on outsourcing, inviting sharp reactions from highways minister Kamal Nath and commerce minister Anand Sharma.

The US dissatisfaction with the just-approved nuclear liability bill and New Delhi's refusal to change the legislation is another complicating factor and can lead to a souring of mood before Obama's visit.

The attack on outsourcing came weeks after the US raised fees for H1-B visas that will directly affect Indian techies and Indian companies in the US.

"We see a future where we invest in American innovation and American ingenuity," Obama said. "Because I don't want to see new solar panels or electric cars or advanced batteries manufactured in Europe or Asia. I want to see them made right here in the US of A by American workers."

Outsourcing is clearly a key issue in the forthcoming US elections in November, particularly in Ohio, which only last week, bowed to populist pressure and banned outsourcing to overseas companies, which has raised an outcry in India.

Significantly, the "tax breaks" that Obama is referring to relate to corporate tax. And US companies, over the years have moved a lot of their offices to countries in Europe which have lower tax rates than the US. This has meant that the US government has been denied tax revenues from these countries because of double taxation avoidance arrangements.

If Obama wants to change that, India is unlikely to be much affected. That's because US companies operating in India do so to arbitrage labour costs, not taxes, because Indian corporate tax rates are actually higher than the US.

Significantly, though it is attractive to sell China and India as the contemporary adversaries taking away American jobs, at least this particular ending of tax breaks is not aimed at countries like India.

However, what it shows is that US under Obama is much more protectionist in outlook than it has been. And fundamentally, that is a problem for India.

Despite the fact that the Indian government is trying to gloss over a lot of the outsourcing issues that have been aired recently, this promises to be a thorn in the forthcoming visit.

Commerce minister Anand Sharma said India would formally convey its disappointment to the US over the ban imposed by the state of Ohio on offshore outsourcing at the high-level bilateral Trade Policy Forum meeting in Washington later this month. "It will be on the agenda. I will raise the issue at the Trade Policy Forum meeting there definitely," Sharma said in New Delhi. The TPF is the principal trade dialogue between the US and India.

However, Sharma is likely to hear an equally strong outburst from the US side on the nuclear liability bill. US companies have felt cheated on the bill, which makes suppliers liable, and believe it is designed to keep American companies out of the Indian market.

In the run-up to the Obama visit, the road is not getting smooth.

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