HIRE Act may not pass muster; to hurt US firms more than Indian IT if approved

The proposed Halting International Relocation of Employment (HIRE) Act, aimed at making outsourcing costlier and reducing reliance on cheap foreign labour, could partly affect Indian IT firms, which earn nearly three-fifths of their revenue from the US.

The analysts cited earlier said that the cost of servicing technology needs of large US-based multinational companies is expected to jump, and that America lacks the talent pool required to meet the tech demands.

“Our base case is services will be spared. Technical factors aside, no other country has the scale and skill that India brings in IT services. Unlike factories for goods, replacing software engineers at this scale in a short span is unfathomable. Even if there is a potential increase through taxes, IT services players, if willing, can pass those on to end-clients,” said JM Financial analysts Abhishek Kumar, Nandan Arekal, and Anushree Rustagi, in a note dated 7 September.

This essentially means that the Indian IT firms aren’t likely to be hit immediately, and that their profitability might not get impacted.

Cost implications and margins

Traditionally, if an outsourcing tax is imposed on payments to IT service providers, overall billing would be reduced and ultimately, the margin is expected to shrink. This might lead to the IT outsourcers looking at other cost-cutting avenues.

Four of India’s big five IT services firms, namely, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd reported a jump in margins last fiscal to 21.1%, 18.3%, 17.1%, and 9.7%, respectively. Tata Consultancy Services Ltd, the country’s largest IT firm, reported a decline in margins to 24.3%.

For now, the bill has to get the approval of the House of Representatives and the US Senate, before getting president Donald Trump’s assent to become a law.

The proposed legislation also comes at a time when the country’s largest information technology (IT) outsourcers are engaged in a three-front war with an uncertain demand environment, AI eating into their revenue, and higher competition from mid-sized peers.

Impact to hit US clients more than Indian IT

However, experts believe the impact of the American proposal will be more on US-based companies than it will be on homegrown tech service providers.

For one, the cost of services provided by IT services companies will jump.

“Cost for US-based companies will increase because they will have to pay more money as tax, apart from the money they pay to IT outsourcers for the people deployed in their projects,” said Amit Chandra, vice-president at HDFC Securities.

Pramod Gubbi, founder of Marcellus Investment Managers, echoed this view, but added that the tax-led increase in costs might be split between the service provider and the client.

“Ultimately, this 25% might be split between customer and service provider. It could be equally split or divided,” Gubbi added.

HDFC’s Chandra added that the ultimate payer of this outsourcing tax will not be known. “It will be a mixed bag to determine whether the client passes the entire tax to the IT outsourcer or absorbs it to a certain extent. IT companies can receive less money for each executive servicing the client but the extent of this will be unknown,” said Chandra.

In other words, if the IT outsourcer was getting $100 dollar per employee from the client, it might get $80 if the legislation is passed and if the client decides to pass on a portion of the taxes to the tech service provider to reduce its own cost.

IT services companies are traditionally billed on the number of people deployed in a project. Most of these people work on offshore locations like India and Brazil, away from the clients’ location, which in this case is the US.

Most tech-related work for clients is now managed by employees based in India, and reliance on workers deployed at client sites continues to decline.

Visa constraints

The country’s ten largest software service providers are using about 14,000 H-1B visas, which allow skilled non-immigrants to work in the US for a limited period of time, as of June 2025. That’s just a third of the H-1B holders they had a decade ago.

The number of H-1B visa holders is expected to fall further.

“This will impact IT companies’ ability to send their consultants abroad to client locations with the US getting stricter with the foreign workers coming in. Imposing a cost on foreign labour will force the US firms to look for more US-based hiring for skilled, niche roles. Now that is also made hard to come by due to restrictions on foreign workers coming in. It’s either this or the US will have to lower this tax, something has to give.” said Ashutosh Sharma, vice-president of Forrester Research.

The fresh concerns in the IT sector stem from the HIRE bill, introduced on 5 September by Ohio Senator Bernie Moreno, which proposes a 25% tariff on payments to foreign entities for services provided to American firms.

On 1 September, political activist Jack Posobiec tweeted that “all outsourcing should be tariffed,” arguing foreign countries must “pay for the privilege of providing services remotely to the US the same way as goods”. This post was later reposted by Peter Navarro, senior counsellor for trade and manufacturing to president Trump.

According to the US Senate website, this bill was introduced to protect American workers from outsourcing by disincentivizing US companies from chasing cheaper wages and hiring foreign workers.

“The legislation will impose a tax on any company that employs foreign labor instead of Americans and will use the generated revenue to fund workforce development programs to help the middle-class,” read Senator Moreno’s website.

However, there is no immediate threat to Indian IT services companies.

“Any imposition resembling a ‘services tariff’ would require new legislation – such as a tax or fee on cross-border service transactions – something that the US President cannot unilaterally impose without Congressional backing. This legal distinction might be a reason as to why services remain outside the tariff framework, for now,” the JM Financial analysts wrote.

Still, the JM Financial analysts noted, Trump could tighten ‘H-1B/L-1 visa rules (impacting IT outsourcing), impose sanctions to restrict payments to foreign service providers, and deploy regulatory levers in telecom, data, and financial services via agencies.