CHENNAI: As the US targets India’s IT services sector with higher H-1B visa fees and a proposed 25 percent tax on outsourcing, tech experts say it is time for the industry to focus inward — by upskilling the domestic talent pool and investing more in artificial intelligence (AI) to position India as a global tech hub.
While H-1B visa fees on new applicants have increased 20-25 fold, there’s another sword hanging over the head -- Halting International Relocation of Employment (HIRE) Act.
On September 5, US Senator from Ohio, Bernie Moreno, introduced the HIRE Act, which is yet to be passed. The Bill proposes a 25 percent duty on US companies that outsource jobs in tech and other sectors.
And even if experts believe the Act is unlikely to pass in its current form – they expect it to be diluted due to strong resistance from US corporations heavily dependent on Indian outsourcing – it can have a far-reaching impact on the Indian IT sector along with the H1B visa shock.
Manas Dasgupta, Chairperson of the Bangalore Chamber of Industry and Commerce (BCIC) IT Cybersecurity and AI Expert Committee, said: “A watered-down version is more probable, potentially featuring a reduced tax rate of 10–15 percent, sectoral carve-outs, or phased implementation rather than the proposed 25 percent outsourcing tax. The legislation faces opposition from US corporations who benefit from cost-effective Indian services, making passage in its current aggressive form politically challenging.”
IT consultants also argue that the Bill could face legal challenges and lobbying pressure in the US Senate. Moreover, under the WTO Moratorium on Customs Duties on Electronic Transmissions, member countries have agreed not to impose customs duties on digital services since 1998. “This moratorium, last extended in 2024, will remain in effect until 2026,” said Ravindra Desai, an IT consultant.
If diluted, experts say the Bill may include exceptions and relaxations. “The potential changes could involve exemptions for certain industries, small firms, or pre-existing contracts; a narrower definition of consumer benefits to avoid overreach; reduced compliance and reporting obligations; or partial retention of deductions and tax offsets,” said Gireesh Gachinamath, founder and MD of Gipzonics Techno Labs LLP.
He added: “Overall, I believe the HIRE Act has a 30–50 percent chance of passing in some form, but only a 10–20 percent chance of passing as introduced. A modified version is more likely — one that preserves the political messaging of discouraging outsourcing while reducing the financial burden through exemptions or phased rollouts.”
HIRE to affect India and the US equally
India derives nearly two-thirds of its tech sector revenue from the US. Kamal Karanth, co-founder of Xpheno, said: “Irrespective of the skill and innovation arbitrage that India offers, cost arbitrage remains a significant factor, particularly for long-duration, high-value client projects. With manpower as its raw material, the IT services sector’s talent pyramid is directly affected by shifts in client context. At current exposure levels, passing the HIRE Act could impact 40–60 percent of the workforce in India’s IT services cohort. A highly undesirable outcome would be the combined effect of H-1B restrictions, tariffs on services, and the HIRE Act passing in some form — a situation that would hurt both Indian IT companies and US customers equally.”
Focus on Tier-2 and Tier-3 Cities
Experts argue that India must also decentralise its IT industry by expanding into tier-2 and tier-3 cities. M Balasubramaniam, CEO of Stratinfinity, a GCC consultancy firm, said: “It is high time that IT and GCC companies shift to tier-2 and tier-3 cities and invest in upskilling and reskilling employees in AI to match international standards and compete globally.”
Dasgupta added that these cities are already showing promise. “Tier-2 cities are experiencing a 42 percent increase in job openings compared to 19% in metros, offering 25–30 percent lower talent costs and 50 percent reduced real estate expenses. They also provide 40 percent lower attrition rates, access to untapped talent pools, and attractive government incentives. States like Karnataka, Tamil Nadu, and Uttar Pradesh are actively promoting GCC expansion in smaller cities, making this the right time to decentralise India’s tech ecosystem,” he said
However, Karanth of Xpheno noted that talent trends remain concentrated in big cities. “The pandemic-driven reverse migration temporarily turned non-metro locations into tech hotspots. But once lockdowns ended, the return to metros was even faster. Today, 83 percent of active tech demand is concentrated in and around megacities. Tier-2 and tier-3 cities may have the infrastructure, but retaining talent remains a long-term challenge.”
Smaller IT firms, which have limited geographic diversification and higher US market dependence, could face disproportionate losses of 15–25% in revenue. To mitigate risks, Dasgupta suggested contract restructuring with change-in-law clauses, niche specialization in AI and cybersecurity, and dual-shore delivery models.
Diversification and preparedness
India faces a projected shortage of 1.4 million AI professionals by 2026, making reskilling critical. The IndiaAI Mission’s Rs 10,300 crore allocation over five years, coupled with a GPU capacity of 18,693 units, provides a foundation.
“With 50 percent of India’s tech workforce already receiving AI training and 87 percent of companies reporting progress on AI strategies, India must integrate AI into educational curricula, strengthen government–industry collaboration on practical training, and promote open-source AI adoption to enable cost-effective scaling,” said Dasgupta.
Experts also stress the need for Indian IT companies to adopt a three-pronged strategy to prepare for the HIRE Act. "First, expand operations into Southeast Asia, West Asia, and Africa where digital transformation is accelerating; second, invest in emerging technologies such as GenAI, cloud, quantum computing, and cybersecurity; and lastly, upskill the workforce through NASSCOM, DSCI, and government-led AI and cybersecurity initiatives," says Karmendra Kohli, co-founder & CEO of SecureEyes.
“Companies should take a cue from the $300-billion Oracle–ChatGPT deal,” said Dasgupta.
“Cash surpluses must be invested in AI computing capacity, cloud infrastructure partnerships, and data center expansions projected to exceed $100 billion by 2027. Indian IT firms should pursue joint ventures with global AI leaders for technology transfer, reduce reliance on proprietary systems through open-source AI, and acquire specialized capabilities in quantum computing and blockchain to future-proof their business models.”