Monday, November 16, 2009

Indian IT cos EU billing rates may come under tax strain

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ANEW tax rule in the European Union (EU) is making the light at the end of the tunnel for Indian IT service companies look a little dimmer.

Starting January 1, the 27-nation bloc plans to impose value-added tax (VAT) on services delivered from non-EU nations, including India, a move which will put a renewed squeeze on profit margins of companies such as Tata Consultancy Services, Infosys and Wipro, offshore outsourcing experts and tech firms said.

European companies that outsource IT and backoffice work will be looking to extract better value out of their service providers to offset the financial implications of the tax, which could increase the cost of such projects by up to 25%, said Nick Beecham, partner at the UK-based law firm Field Fisher Waterhouse.

Europe accounts for over a quarter of the $60-billion revenues of the Indian outsourcing industry. Many businesses will already be doing this in the current economic climate. We particularly expect to see this happening with those outsourcing contracts that were signed two or more years ago at the height of the economic boom, Mr Beecham said, expecting outsourcers to renegotiate billing rates at least 10-15 % lower.
Most contracts have terms included for addressing potential tax implications, but rates have been shrinking in any case for most outsourcing companies, a senior official at an IT company said on condition of anonymity.

Customers want to do more with less, and this tax issue can be an effective excuse for driving rates further down, this person added.

The tax rule change was made in February 2008 to come into effect from January 1, 2010. Preoccupied with other more pressing challenges during the worst economic crisis since the Great Depression, companies are only now beginning to look at amending contracts to take into account the financial implications of the new levy.

Sridhar Vedala, managing director of outsourcing advisory firm Quantum Step, is of the view that projects will become more expensive depending upon VAT rates in different EU countries. This would mean an increase of up to 15% in the UK, and in continental Europe its higher, as much as 25%, he said.