PHOTO: AFP/FILE

REUTERS, Bengaluru

India’s massive IT sector faces a lengthy period of uncertainty with customers delaying or re-negotiating contracts while the US debates a proposed 25 percent tax on American firms using foreign outsourcing services, analysts and lawyers said.

The sector is likely to be on the receiving end of a bill which, though unlikely to pass in its nascent form, will initiate a gradual shift in how big-name firms in the world’s largest outsourcing market buy IT services, they said.

Still, with US firms having to pay the tax, those heavily reliant on overseas IT services are likely to push back, setting the stage for extensive lobbying and legal battles, analysts and lawyers said.

India’s $283 billion information technology sector has thrived for more than three decades exporting software services, with prominent clients including Apple, American Express, Ciscob, Citigroup, FedEx and Home Depot. It has grown to make up over 7 percent of GDP.

However, it has also drawn criticism in customer countries over job loss to lower-cost workers in India.

Last week, US Republican Senator Bernie Moreno introduced the HIRE Act which proposes taxing companies that hire foreign workers over Americans, with the tax revenue used for US workforce development. The bill also seeks to bar firms from claiming outsourcing payments as tax-deductible expenses.

The bill could not have come at a worse time for India’s IT sector, which is struggling with weak revenue growth in its mainstay US market as clients defer non-essential tech spending amid inflationary pressure and tariff uncertainty.

“The HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts,” EY India’s compliance head Jignesh Thakkar said.