- India's technology industry has attacked proposed new
US legislation that bans the outsourcing of federal work to low cost countries
arguing it is a protectionist measure contrary to the spirit of free trade.
-
- The move by the US Senate coincides with decisions by
a number of foreign companies to halt further outsourcing to India because
of a new domestic tax ruling that would enable the Indian government to
tax part of their worldwide earnings.
-
- The US bill, which was passed by the Senate of Friday
but has still to be signed by President George W. Bush before it becomes
law, is the most significant attempt to stop outsourcing, a fast-growing
industry trend that has led to the loss of thousands of highly-paid technology
jobs in the US and become a hot political issue in a US election year.
-
- Although US federal contracts account for only 2 per
cent of India's IT earnings, the bill sends a worrying message to the Indian
outsourcing industry, which has been lobbying hard to stave off protectionism.
-
- Arun Shourie, Indian's information technology minister,
said the bill damaged the outlook for talks on freer multilateral trade.
Kiran Karnik, president of Nasscom, the umbrella body for Indian IT, said
he "hoped wiser counsel would prevail" before the law was enacted.
-
- The revenues from India's technology industry are forecast
to expand by a third to $15.5bn in the year to March, with two-thirds of
the growth coming from the US, as more companies in North America and elsewhere
leverage India's high IT skills and low costs.
-
- But US companies such as JP Morgan and General Electric,
which have outsourced thousands of jobs to India, could be casualties of
the controversial rule on the taxable status of foreign companies' outsourced
units. This week Nasscom said three unidentified foreign companies with
back office operations in India had frozen future outsourcing until "there
was clarity".
-
- The government circular, which is binding on the tax-collecting
authorities, says a foreign company's global income would be taxable under
India's double-tax treaties if that company's outsourced unit in India
carries out "core revenue-generating activities." Non-core activities
conducted at arm's length and at fair market value would be exempt.
-
- Accountants say the ruling introduces artificial distinctions
between core and non-core work. "This raises technical ambiguities
that could lead to litigation," said one tax expert.
-
- Experts say an accepted principle of global accounting
norms is that double-tax treaties override domestic tax regulations. Foreign
companies could therefore appeal to double tax pacts, which prevent the
imposition of taxes from different countries on the same business, to circumvent
the circular.
-
- Nasscom has protested to the Indian government, arguing
the measure is contrary to the government's tax-friendly stance towards
a nascent, job-creating industry.
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