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Old 6th May 2009, 18:32   #1
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Default Obama's new Tax plans

Can anyone explain if Obama's Tax plans would affect Indian IT companies? I've been reading a few news article on this, but there is no clarity. I'm getting a confused view on this. Some people say that it would benefit Indian firms as US IT firms (such as Accenture, IBM) would have to raise their rates making our rates more competitive. Others say that the Tax plans will make US firms cut down on outsourcing projects to Indian firms.

So, can someone please shed some light on this?
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Old 6th May 2009, 20:34   #2
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Current Scenerio: If an US company gets some work/service done in India, the payment for that will be treated as expense, completely tax deductable.
Obama's Proposal: The payments made to foreign entity won't be treated as expense, the company will be forced to pay tax on it.

In other words, US companies are currently paying for Indian services using pre-tax income, Obama wants them to pay it using post-tax income.

Example:
Now
US company has $200 revenue.
They pay Indian company $100 for oursourced service.
US company is left with $100 profit and pays 35% tax on it. (ignoring all other expenses)
US company is left with $65.

Future
US company has $200 revenue.
US company pays 35% tax on it and is left with $130. (ignore all other expenses)
They pay Indian company $100 for oursourced service.
US company is left with $30.

Now you see that the US company profit after tax is more than halved. This is Obama's way of discouraging outsourcing by US companies.
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Old 6th May 2009, 21:07   #3
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Future scenario - US exporters worldwide suffer due to being cost uncompetitive and push Obama back

They already have a horrible deficit - this will get worse
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Old 6th May 2009, 21:17   #4
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Moving the jobs back to US will increase the operating cost by 2-3 times. Obviously the cost will be passed on to the end customers. Imagine if everything starts costing 2-3 times more than before... It will be chaos!
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Old 6th May 2009, 21:35   #5
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Let's compare these 2 options-

Future (if work is outsourced to Indian companies)
US company has $200 revenue.
US company pays 35% tax on it and is left with $130.
They pay Indian company $100 for oursourced service.
US company is left with $30.

Future (if they do the job in-house)
US company has $200 revenue.
US company pays 35% tax on it and is left with $130.
They pay a US company $300 for service.
US company occurs a big loss

To counter this, US companies will now have to charge 500-600$ for the same job to their clients, needless to say the clients will have to pass this additional expense to their customers. So they end up paying 2-3 times more for the same service. I'm not sure if this will be viable in an economy which is already in tatters.
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Old 6th May 2009, 21:53   #6
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All rest of the world needs to do is this

"They will consider to tax local companies buying products from U.S companies more than what they would if they could buy from non-U.S companies".
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Old 7th May 2009, 15:01   #7
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Ok, so the new rule would make US firms less profitable. But doesn't it means that whether they outsource or not, they would still have to pay the full tax. Hence isn't it then better for them to outsource the work, as the costs involved would be lower than it being done in US? So Indian IT firms need not worry, right?
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Old 7th May 2009, 15:24   #8
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Quote:
Originally Posted by DriverR View Post
Ok, so the new rule would make US firms less profitable.
There is a long way to go for Obama before this "rule" becomes a law.The biggest objection will come from the same lobby of industrialists that funded his campaign.
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Old 7th May 2009, 15:33   #9
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So what happens if India makes royalties paid to non-Indian entities originating from specified countries for use of trade marks, patents, etc. non-tax deductible?

Trade war, eh?
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Old 7th May 2009, 17:32   #10
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Even the IT sector is getting affected as Obama did suggest the US companies to prefer Buffalo to Bangalore.
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Old 7th May 2009, 20:45   #11
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The following article explains the implications
Obama vs. Outsourcing - BusinessWeek
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Old 7th May 2009, 20:55   #12
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Another aspect from The Hindu Businessline.

The Hindu Business Line : Outsourcing benefits may override tax concerns for US cos
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Old 11th May 2009, 17:36   #13
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IT will hit most, pharma to follow.
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Old 12th May 2009, 16:49   #14
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Remember all Huu-Haa in India when Obama got elected?
People obviously forgot that his job is to serve US interests, not Indian. Duh!

I think India should not be too dependent on other countries like US to feed itself.
Instead, India should build its own industry, and challenge them with good competition.

It is a shame that most people in India never give a second thought that they so dependent on another country. India, Go Independent!!

Last edited by aerohit : 12th May 2009 at 16:50.
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Old 12th May 2009, 17:18   #15
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I definately agree to many of us while I would like to defer with many.
First of all Obama has a Panel of experts which form a advisory committee. When Obama is speaking of a Tax reforms he is not getting to that podium and saying things that his heart or mind is in mood for. Agree? Like many of us said lets not forget the cost benefit. Do simply this goto Job Salaries-Performance Reviews-Compensation software- Salary.com and then visit PayScale - Salary Comparison, Salary Survey, Wages enter the same skill set of a professional say a Project Manager, Developer, QA Tester. Compare the Median of Newyork to that of Mumbai. Use Rs 48 = 1$ and the numbers will speak for itself. Let me give you a basis and save you some trouble. (Disclaimer: you can be making more or less my figures are based on past experiences)
Developer in India = Rs 7 to 8 lakh Vs. $ 65,000 t0 75000 anually with say 5-6 years of exp
QA Tester = Rs 5 to 7 lakhs Vs. $ 50,000 to 70,000 (5-6 yrs exp)
Project Manager = Rs 10-15 Lakhs Vs. $ 70 to 85,000 (5-6 yrs exp)

Now consider the tax reforms have affected the companies in USA to raise their prices by 35%(assume) to maintain their previous profits. Following questions arise
1. Do you think any body would buy at this price?
2. With companies that opted for a 'Bail out' they cant issue any more H1b visas where will they get resources from?

A simple survey online shall tell most Indians work in the software industry and bear H1b visas. Now either they can be hired as consultants and work for a very low price or just stay unemployed.

I dont think he meant in a literal sense to move to buffalo but has anyone been there? its a dead city. Infrastructure needs to be in place for that they need money for money they need banks (which are not there). World bank wont issue loans that easy too.

I am no expert at this and I could completely be wrong. But I think Indian industry shall not be affected that much yet it shall take a very long time. Its a grid lock for now that so many companies have recruitment freezes and job swaps wont occur.

my two cents.
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