The way this works is; captive units of US firms in any other geography (it could be India, Philippines, China, etc.) are considered different entities under US tax rules."

US firms pay tax on the income from these subsidiaries only when they repatriate these earnings (profits) to the US. Firms need to pay 34 to 35 per cent of federal tax on these earnings. "In most cases, US firms do not send the money back to the US as they continued to invest this money in expansion and other operations. Now the US government is saying it will match deduction and income together, so they will not get the tax benefits," he said.

Added Eric Peden, director international tax, PriceWaterhouseCoopers, "One suggestion pertains to the deferral of deductions for expenses related to deferred income. This was made since US firms are able to defer US taxation of foreign profits for a long time. But these are yet to get an approval from the Senate."

He pointed out, however, that "business decisions always take into consideration the cost factor. Companies will continue to weigh the tax benefits against the cost savings.

India's second largest IT services firm Infosys Technologies declined to comment on the matter. "We don't want to speak on this till more details are available," a company spokesperson said. Wipro Ltd, too, said it did not want to "react" at this moment.

“This is a complex issue as enormous job losses have taken place in the US and it will be difficult to quantify the tax losses due to this. Moreover, the US consumers may end up paying higher taxes if such a thing happens,” said Alok Shende, principal analyst and founder director of consulting firm Ascentius.

Analysts also said this issue will be debated on and there are many lobbies to protect the interests of India. “We should not be overtly concerned but wait for follow-up action. There is no cause of worry in the short run,” he added.

Meanwhile, industry experts also point out that Indian IT firms have started increasing their presence in foreign countries, including the US. For instance, India's largest IT services provider Tata Consultancy Services (TCS) has close to 7,000 people in Latin America (of which close to 97 per cent are locals). TCS has also set up a delivery centre in Cincinnati, US with a capacity of 1,000 people. So far it has recruited 300 people.

Similarly, firms like Infosys, Zensar Technologies and BPO firms like Firstsource have been increasing their hiring in the US.So far it has recruited 300 people.

Source: Business Standard