India’s $283 Billion IT Sector Faces Uncertainty as U.S. Weighs Outsourcing Tax

India’s massive information technology (IT) sector, a $283 billion industry that powers global corporations, is bracing for a period of prolonged uncertainty. The trigger is a new U.S. bill proposing a 25% tax on outsourcing by American companies, a move that could reshape contract economics and force clients to delay or renegotiate deals.

Outsourcing at the Core of India’s IT Economy

For over three decades, Indian IT firms have been central to global outsourcing, serving clients such as Apple, American Express, Cisco, Citigroup, FedEx and Home Depot. The sector contributes more than 7% to India’s GDP and employs millions directly and indirectly. Its growth has been driven by offering cost-efficient software services and support to U.S. and European clients.

However, outsourcing has long been criticised in customer countries, particularly the United States, for shifting jobs overseas. This sentiment has gained new momentum amid inflation, trade frictions and political debate over protecting domestic employment.

The HIRE Act Proposal

Last week, U.S. Republican Senator Bernie Moreno introduced the HIRE Act, which aims to discourage reliance on foreign outsourcing. The bill proposes:

·       A 25% tax on American companies outsourcing services overseas.

·       Use of tax revenue for U.S. workforce development.

·       Restrictions preventing firms from claiming outsourcing expenses as tax-deductible.

Industry Warnings and Potential Impact

Experts warn that if implemented, the legislation could sharply raise costs for U.S. companies outsourcing work to India. According to EY India’s compliance head Jignesh Thakkar, combined federal, state and local taxes could push the effective levy on outsourced payments as high as 60%.

“The HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts,” Thakkar told Reuters.

Arun Prabhu, partner at Cyril Amarchand Mangaldas, added: “While its partisan proposal may seem initially attractive, it’s ultimately an artificial cost which makes organisations less competitive and profitable globally.”

Timing and Market Conditions

The proposal comes at a fragile moment for India’s IT industry. Revenue growth has slowed in its largest market, the United States, as clients defer non-essential spending due to inflationary pressures and tariff uncertainty. Contract renegotiations and delays are already visible across multiple firms, according to industry executives.

Growing Political Momentum

Even if the bill faces hurdles in Congress, the broader idea is gaining traction. Earlier this month, White House trade adviser Peter Navarro reposted a call from far-right activist Jack Posobiec advocating tariffs on services, not just goods. Such messaging highlights the growing political appetite in Washington to curb outsourcing practices.

Read More: US Tariff Hike Threatens Over 2 Million Jobs in Indian Apparel Sector

Conclusion

India’s IT sector, worth $283 billion and integral to global corporations, now faces a new wave of policy risk from its largest market. While the HIRE Act may not pass in its current form, the debate underscores a growing shift in U.S. attitudes toward outsourcing. For Indian IT firms, the period ahead is likely to be marked by contract uncertainty, pricing pressure and a need to re-strategise amid evolving regulatory landscapes.

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