Obama's tax plan could push up outsourcing cost 50%

 

Obama has proposed to tax expenditure by US companies on availing services from outside the country from 2011

 

American firms could see a 50% rise in the cost of outsourcing business processes to India if President Barack Obama's new tax proposals is 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.

 

Source: The Economic Times