NEW DELHI | BENGALURU: Many US firms have begun to review their plans to set up or expand R&D centres in the India, in what industry experts see as a fallout of the Trump administration’s new additional tax on companies that move work to offshore subsidiaries.
“We are seeing that companies are re-evaluating their plans,” Nasscom president R Chandrashekhar said. “It’s not that they have decided not to go ahead, nor they have decided to continue as they had planned.
But most are reviewing their plans at this stage,” he told ET. The Base Erosion and Anti-Abuse Tax (BEAT) that became effective in January is part of US President Donald Trump’s plan to protect local jobs and prevent them from moving offshore. The BEAT rate is 5% in 2018, and will double to 10% in 2019.
The US has also reduced the corporate tax rate from 35% to 21%, a move which is aimed at giving companies more headroom to invest and hire more people in the US.
The new taxes are the latest blow to the Indian IT industry struggling with technology shifts — budget cuts for traditional outsourcing in favour of emerging areas in digital and cloud, automation and rising protectionism in its main markets such as the US and UK, which contribute four out of five dollars they earn.
The move could affect India’s position as a research and development (R&D) hub for global corporations in the long run. Chandrashekhar said the two US tax reforms will have “significant adverse impact” on new investments as well as expansion into India. “It will dampen growth in business being done from India for the US. The impact is adverse because the economics of both of these have changed significantly in a negative way,” he said.
Chandrashekhar, however, said availability of talent in India will continue to attract investments in India despite the increased tax burden.
India houses more than 1,100 captives, or global in-house centres (GICs), of firms such as General Electric, Honeywell and Citibank that deliver core work out of their centres across the country. These captives employ more than 800,000 professionals, generating approximately $ 23 billion in revenue, according to a 2017 report by researcher Bain and Co. Also, large technology companies such as Google, Microsoft and Adobe have huge R&D centres in the country.
Milan Seth, technology industry leader for EY India, said as far as captives are concerned, the tax does make it more difficult and expensive to set up in India. “But it’s a negative not just for India but for any country outside the US.”
He said the impact on India is higher because a lot of US companies have significant presence in the country. “The way to overcome it from a business point of view is to have more near shore presence through centres set up in US,” Seth said.
Large firms that already have significant investments in terms of research and development (R&D) work and already employ thousands of engineers would not be impacted as these companies would already benefit from scale that would offset gains from the new tax, said experts.