'It should have been Shanghai, not Bangalore'

United States President Barack Obama's proposals to amend the US tax structure since it allegedly encourages creation of ". . . a job in Bangalore, India, (rather) than create one in Buffalo, New York", has made the IT sector in India edgy.

In Bangalore to attend an event of Nasscom, the industry association, its Chairman, Pramod Bhasin, and President, Som Mittal, explain their stance in a chat with Bibhu Ranjan Mishra. Edited excerpts:

Text: Bibhu Ranjan Mishra

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Bangalore seems an obsession with every US lawmaker.

Bhasin: I think Obama has got his geography wrong. It should have been Shanghai, not Bangalore.

Mittal: What he was trying to mean is creating more jobs in the US. It's just unfortunate that the city has got named.

So is US protectionism back?

Mittal: Economies like the US and Europe have dramatically seen job losses in manufacturing, construction and retail. Whenever these kinds of things happen, there are (such) tendencies.

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This is obviously not good news for Indian IT services.

Mittal: Protectionism is always responded to by protectionism. The fact is that economies across the world, including the US, have gained enormously by reaching out to the markets outside.

So, I think there will be lot of rhetoric on protectionism, but most of the Bills get diluted at the end.

What is Nasscom's stance on Obama's new tax proposals?

Mittal: It has nothing to do with India. It's about how US subsidiaries are structured and what is the taxation the US follows.

Bhasin: The proposals aim to contain two separate things. One is about tracking tax abuse. It's not just about tax savings, but about people who hide income and don't declare it.

The second issue is about companies who derive profits from overseas operations and are not giving it back to the US. Any other government would have done the same thing.

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Are you saying it won't affect Indian IT?

Bhasin: The issue is not about moving work to India but how companies in the US are making profits overseas without paying back to the government.

The tax proposal applies to investments by US companies in Austria, Germany, Switzerland, the UK and in any overseas territory. India is a small size of that.

What about multinationals with operations in India?

Bhasin: Certainly, it might change some economics in terms of how Americans companies think about where they should generate profit and where it is profitable for them to set up shops.

But people don't take business or strategic decisions based on tax rates, fundamentally. If I want to be in Latin America, that the India factory is more profitable will not drive my business decisions.

Mittal: It is about how US companies expand operations outside. I think when the debate will start, the clarity will start emerging.

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Will the tax proposals help Indian IT outsourcing?

Bhasin: Potentially, but I doubt it. People rarely make decisions about their companies based on one legislation or other. That is an old Indian habit in the licensing raj, when companies built their entire profitability model based on what licence they got.

Will you lobby against the tax reforms, like you did on the visa legislation?

Mittal: If we see it is impacting us as the Bill gets processed, we will do the needful. We are a $50 billion industry, of which about $30 billion revenue (which is about 60 per cent) comes from the US. Around 70 per cent of that is done by Indian companies.

We do a lot of work in the US for which we pay taxes. The tax rate in India and the US is almost similar. So, this is not about the difference in tax rates.

Multinational companies are cost-centric, they are not profit-centric. President Obama has been speaking about $600 billion profits US companies are making outside of the US. The number I mentioned is nowhere close.

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The anti-outsourcing lobby in the US is much more active now?

Bhasin: It is bound to be. Unemployment has doubled in the US. What do you think will happen in India if unemployment doubles and we are outsourcing to China? People are naturally worried about job losses. We are equally worried about them losing jobs, as many of them are our clients, partners.

Earlier, the Nasscom team met US lawmakers. Your lobbying does not seem to be yielding results.

Bhasin: They listened very nicely to us. We work with US industry bodies; we work with lobbying companies, which help us reach out to the right senators and the right people in the administration. And, of course, our member companies also do this at their individual level.

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So, is this mere political rhetoric?

Bhasin: People are losing jobs in America, the magnitude of which is yet to be seen in India. People who have worked all their life are seeing their planned savings becoming half, their home value reducing to below the mortgage value.

Suddenly, from a point when they thought they had enough money to save and retire, they have no money left and have to go back to work. Rhetoric like this will increase till the economic recovery starts.

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