India Inc on Tuesday described the United States President Barack Obama's announcement to punish American firms by levying high taxes on their outsourcing business as 'protectionist' and a retrograde measure that, it said, will hurt the US companies.
In a media statement issued on Tuesday, the National Association of Software and Services Companies, said that Obama's proposals could hurt US companies' competitiveness.
'We are in the process of reviewing the new tax proposals by President Obama. However prima facie the proposals appeared to be aimed at addressing the tax rate differentials that exist across the world and if implemented, this would impact United States-headquartered companies with overseas operations.
Current law in the US states that 'any income that is earned outside the US is not taxed until such time it is brought back into the US' -- the Obama proposal aims to alter that to raise the revenues of the US government.
Other nations, especially in Japan and Europe are moving to a territorial system that taxes only corporate profits earned within their borders and the latest US proposals are contrary to the trend. This may actually end up reducing competitiveness of US companies with global operations when compared to their European and Japanese counterparts.
As far as India goes, global companies that earn profits here are subject to a tax rate of 33.9 per cent (including surcharge and cess) and the impact of the proposed reforms on them would be marginal.
The tax reforms announced on Monday have only been proposed and there will be extended debate on them before they can be implemented, as it requires existing laws to be changed.
Business groups in the US have assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger US jobs.
It is important to note that most large American companies have more than 50 per cent of their revenues coming from markets outside the US and would be affected by the proposed tax reforms, if implemented.
"Taking measures that would force companies to restrict their economic activities in one vision and not in the other is a retrograde step," the Federation of Indian Chambers of Commerce and Industry said.
Ficci president Harsh Pati Singhania said while Obama's move would have some impact on the US investment abroad and into India, in the long run this would only run counter to the interest of US corporations seeking global presence.
Obama had said that the US would stop letting American firms which create jobs abroad take deduction on their expenses in their tax liabilities.
"It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York," Obama said.
Criticising the US President's announcement, Assocham President Sajjan Jindal said, "Taking resort to protectionist tendency will kill the spirit of competition. . . and dilute the spirit of WTO."
He said an American survey recently found that the US benefited ten times more than the countries where it outsourced jobs.
India's software industry garners over 50 per cent of its revenues from the US.
PHDCCI said that the this is an arm-twisting measure. "The US government should not interfere in the affairs of private companies. It is up to the companies whether they want to outsource their business or not," the chamber said.