THIS could harm Indian IT firms more than H-1B changes
What's the story
The recent hike in H-1B visa fees has been a major setback for Indian IT companies. However, an even bigger threat is looming over the sector. The Halting International Relocation of Employment (HIRE) Act, introduced by Ohio Republican Senator Bernie Moreno, seeks to discourage US firms from outsourcing jobs to foreign workers. The proposed legislation would impose a 25% tax on payments made by American consumers to foreign firms for their services.
Potential impact
Major Indian IT firms derive significant revenue from US market
The HIRE Act could pose a major threat to India's $280 billion IT services industry. Major Indian tech firms such as TCS, Infosys, Wipro, HCL Tech, and Tech Mahindra get almost 50-60% of their revenue from the US market. Kotak Securities estimates that over 60% of India's IT services export revenue comes from the US market, around $150 billion out of a total sector size of $250 billion.
Financial implications
Proposed tax could inflate client costs, jeopardizing deal renewals
The proposed 25% tax on outsourcing payments directly targets this revenue stream. Kotak Securities warns that if enacted, it could inflate client costs by up to 46% when the disallowance of deductions is factored in. This would jeopardize the deal renewals and new bookings, especially in cost-sensitive verticals like banking, financial services and insurance (BFSI) and retail which dominate US contracts.
Margin impact
Mid-tier firms particularly vulnerable
The HIRE Act could also compress operating margins by 500-1,000 basis points for Indian IT companies, according to Merisis PMS estimates. Mid-tier firms such as LTIMindtree and Mphasis with EBIT margins of 12-15% are particularly vulnerable. Large caps like Infosys with the higher margins may absorb shocks better but still face erosion in their profitability due to this proposed legislation.
Job concerns
Potential hit to India's GDP
Experts are concerned that the 25% tax on outsourcing could kill high-paying jobs and force IT firms to offer services at a lower price to the US. This would result in low revenue and profit for the IT sector. A hit on this sector's revenue could significantly affect India's GDP, as tech added $283 billion to GDP in 2024, 7.3% of the total figure.
Uncertain fate
Future of HIRE Act remains uncertain
Despite the potential impact of the HIRE Act, its future remains uncertain. G Chokkalingam, the founder and head of research at Equinomics Research Private Limited, believes it is too early to conclude that it will actually be implemented. He views the current H-1B visa fee hike as a tactical bargaining tool ahead of an upcoming ministerial visit to Washington.