Caught in the HIRE Act, Indian IT may lose its cost advantage

A Republican senator’s move to introduce legislation to tax IT services outsourcing in the US could badly hurt India’s tech companies if passed, as it would offset their cost advantage, add to pricing pressures and slow down deal flows.

Senator Bernie Moreno’s Bill, “The Halting International Relocation of Employment Act” (HIRE Act), introduced in the US Senate on Saturday seeks to impose a 25% tax on American firms outsourcing jobs overseas. This is the first time the services sector has taken the centre stage in US trade debates, catching Indian IT companies off guard.

The development comes after the US President’s senior counsellor for trade and manufacturing, Peter Navarro, last week reposted a social media commentary on X that all outsourcing and foreign remote workers be charged with tariffs, triggering concerns in the industry. It also comes at a time when the industry is grappling with pricing pressures and sluggish deal flow due to cautious technology services demand and AI-led disruption.


Analysts warn that if the Bill passes, US clients, who account for over 60% of India’s IT outsourcing revenues, may tighten spending further.

“If passed, the HIRE Act would sharply reduce the cost advantage that drives outsourcing to India,” said Rohit Jain, managing partner at law firm Singhania & Co. “It could slow down fresh contracts, squeeze margins, and make Indian IT firms more dependent on non-US markets for growth.”

Most US clients are likely to pause large-scale deals or renegotiate existing ones or even shift part of the work closer to home to hedge against policy risks, Jain said. “Others could continue working with Indian firms but push harder for better terms, knowing suppliers are under pressure,” he said. “Pricing pressure could intensify, particularly in commoditised IT services like application development and maintenance, though high-end digital transformation and AI-driven projects may be relatively shielded.”

IT companies are diversifyingto Asia, Japan, Australia, Nordics and the Middle East region to tap newer client bases, but are still heavily reliant on the US.

India’s IT stocks slipped into the red on Monday. The Nifty IT and BSE IT index suffered the most drag among other benchmark indices, declining nearly 1% at day’s end. Meanwhile, the NSE Nifty and BSE Sensex ended almost flat.

“The combined effect of the excise tax, federal corporate tax and state-specific taxes could raise the effective cost of offshored services up to 60%,” said Nitin Bhatt, technology sector leader, EY India.

“Many clients may ask their IT service providers to absorb the tax impact by offering tax-inclusive pricing or reducing fees,” he said, adding that clients may increase local hiring in the US and cut visa-dependent teams.

“Unlike past downturns driven by economic cycles, this crisis is man-made, with repercussions not only for Indian IT providers but also for US clients already grappling with rising costs from tariffs and visa restrictions,” said Saurabh Gupta, president at research and advisory services firm HfS Research.

He added that any curbs on outsourcing will squeeze both supply and demand, making delivery more expensive and less predictable.

According to research by SBICaps, the US is India’s top export destination, accounting for 17.7% share of total exports in FY24. India’s trade surplus with the US has reached $45.7 billion. Of this, $38 billion was related to trade of goods, while the rest was services (dominated by IT and software services.)

IT services, including hardware, account for $224 billion of export revenue, 62% of which comes from the US, estimates by Nasscom showed.

Arun Prabhu, partner (head - technology) at law firm Cyril Amarchand Mangaldas, said the Bill, as drafted, could make outsourcing “significantly more expensive” for US entities.

“It’s currently very unclear on what the final language of the Bill will look like. While a partisan proposal may seem attractive, it's very unclear how some types of activity such as development of intellectual property like hardware and software which is sold or used in global markets (including the US) will be treated,” he added.

Experts also flagged potential spill-over of the impact into global capability centres (GCCs), which are tech centres of largely US multinationals and big tech companies with large India offices. These firms also have a large employee base in India.

While GCCs don’t operate on vendor-client billing models, any broad tax regime penalising job relocation could raise compliance costs and slow expansion plans, said Jain of Singhania & Co.

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