India's information technology (IT) and information technology enabled services (ITeS) sectors have long been among the strongest pillars of the country’s growth story. According to NASSCOM’s Annual Strategic Review 2025, the sector generated export revenues of US$224.4 billion in FY 2024-25, employing over 5.8 million people.
The US market historically accounts for more than half of this revenue, underscoring how deeply India’s outsourcing industry depends on American demand. Against this backdrop, the US Senate’s proposal of the Halting International Relocation of Employment Act (HIRE Act) could significantly reshape the contours of India’s IT and ITeS industry.
At its core, the HIRE Act—still at the bill stage—seeks to discourage outsourcing by making it more expensive for US businesses to send work abroad. It proposes an amendment to the Internal Revenue Code of 1986 to impose a non-deductible 25% excise tax on outsourcing payments. Unlike an income tax, which is levied on profits, this excise tax applies to transactions themselves. In other words, the cost is incurred at the point of payment, regardless of profitability, making outsourcing structurally less attractive for US corporations.
The legislation defines “outsourcing payments” broadly to cover any premium, fee, royalty, service charge, or other business payment made to a foreign entity for labour or services benefiting US consumers—directly or indirectly. The inclusion of “indirectly” is crucial, as it aims to block attempts by US firms to reroute services or disguise delivery models to avoid the tax. Similarly, the term “foreign person” includes any individual or entity that is not a US person, thereby extending the law’s reach to virtually all offshore service providers. Making such payments non-deductible would mean not only the 25% excise tax but also additional federal and state levies layered on top.
The HIRE Act also empowers the US Treasury to issue regulations to curb avoidance or abuse via related parties, controlled foreign corporations, intermediaries, or transfer pricing arrangements. It further introduces a reporting requirement for US taxpayers making outsourcing payments. Corporate officers must certify the accuracy of these returns under penalty of perjury. Non-compliance carries steep consequences: the penalty for failing to pay outsourcing tax is 50% over the unpaid 25%, making avoidance prohibitively costly. If enacted, the law would apply to payments made after December 31, 2025—leaving only a narrow window for US corporations and their Indian partners to revisit contracts, delivery models, transfer pricing, and compliance structures.
The bill also links taxation to domestic priorities. All revenues collected from the outsourcing excise tax would flow into a Domestic Workforce Fund, earmarked for workforce development, retraining displaced workers, supporting apprenticeships, and financing state-level employment programs. Thus, the HIRE Act is designed not only to discourage offshoring but also to directly fund onshore job creation.
For Indian IT and back-office businesses, the HIRE Act represents a major risk to their most lucrative market. At the same time, it underscores the need to move beyond reliance on labour cost arbitrage. To stay competitive, Indian firms must accelerate their transition to value-added services such as digital transformation, cloud computing, data analytics, and AI—areas less vulnerable to outsourcing restrictions.
The HIRE Act combines protectionist policy with fiscal enforcement. By imposing a disincentive tax, tightening reporting rules, and channeling revenues into domestic employment, the US is signaling its intent to reduce reliance on offshore outsourcing. For India, whose IT sector remains heavily tied to US demand, the implications are profound. To thrive in this environment, Indian companies must move up the value chain, diversify markets, and highlight the innovation and efficiency that cannot simply be taxed away.
Beyond taxation, however, technological disruption poses an even greater challenge. AI mega data centres planned for launch in the US by 2026 promise unprecedented computing power, enabling automation of many tasks currently offshored — from coding and customer service to back-office operations. The timing of this AI buildout, alongside the proposed HIRE Act, suggests a two-pronged US strategy: tax outsourcing to make it less attractive while investing in domestic, AI-driven capacity to replace it.
(Rakesh Nangia is Chairman, and Sandeep Jhunjhunwala is Partner, at Nangia Andersen LLP)