What does Obama's tax proposal mean for India?

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Eight days ago, when US President Barack Obama gave a seven-minute speech on the need to reform America's tax code, a full-scale panic immediately gripped India's IT sector.



Already sceptical of the new US president's alleged protectionist leanings, Indian business media agencies churned out headlines like 'Obama blasts Bangalore, favours Buffalo!' and 'Obama eager to tax outsourcing'. With their worst fears seemingly confirmed, many Indians found it easy to make the next leap in logic: Obama is anti-India.



But, as the dust settles around Obama's May 4 address, a more sober analysis of the situation reveals that perhaps America's youthful chief executive isn't so much anti-India as he is against overseas business loopholes and legal profit hiding.



So what exactly does all this mean for the over 2 million Indians whose livelihood depends on the IT service industry?

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The statement that has everyone up in arms was Obama's referral to the current tax code as one that "says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York." He also said, "The way to make sure [America stays competitive] is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens."



But that's where Obama stopped, without clarifying. This ambiguity allows his words to be interpreted in many different ways. If you look back to his campaign, however, Obama's argument hasn't changed.



He says that America's current tax code offers incentive to American companies to invest money in overseas operations, rather than spend it at home. He believes this denies the US of both jobs and tax income.



Normally, US companies pay 35 per cent tax on income they generate from overseas operations. But if that money is reinvested in overseas operations, the tax on the original profit can be deferred. Taxes are only requisite when this overseas income is brought back to the US, through investment or dividends.

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It all depends on your definition of a loophole.



Some call the option to reinvest in foreign operations an easy tax haven that companies use to hide profits. They say that US companies which earn profits overseas should pay taxes in the US. Bottom Line.



But, on the other hand, others say that healthy offshore investment is necessary for any company that hopes to become a major multinational, and that by closing this perceived 'loophole', MNCs would have less incentive to invest in their overseas operations.



Regardless, the US Treasury feels that the move would generate $60.1 billion (nearly Rs 3 trillion) in tax revenue between 2011, the proposed year of implementation, and 2019.