After the H-1B visa fee and rule changes, many Indian executives started posting on LinkedIn. They urged their American counterparts to outsource more work to India rather than getting it done onshore. Somehow, I knew Trump wasn’t an idiot. The Indian service sector taking away American jobs wouldn’t go unnoticed.

The HIRE Act 2025 threat

On October 6, Republican Senator Bernie Moreno (Ohio) introduced the Halting International Relocation of Employment (HIRE) Act in the American Senate. The bill proposes a 25 percent excise tax on all payments made to foreign firms for services benefiting customers in the US.

In other words, if an American company outsources accounting, software development, or customer support to another country, it will need to pay a 25 percent outsourcing tax. Further, the bill also impacts tax deductibility. It disallows companies from claiming tax deductions on outsourced service payments.

But what’s the justification for this tax? Well, the HIRE Act aims to discourage outsourcing of American jobs and promotes job reshoring. The revenue collected will go toward a domestic workforce fund to train and reskill American workers in industries affected by outsourcing.

The bill has been referred to the Senate Committee on Finance. If passed, it will take effect on January 1, 2026. Currently, it is in the early legislative stages and still requires committee markups, a Senate vote, House approval, and finally, the President’s signature. Experts suggest it will undergo several changes before clearing all these stages. So, it is a long way ahead.

You might wonder, will lobbyists representing software companies allow this bill to become a law? How likely is it to reach the President’s desk? Well, there is a 30 to 40 percent probability that it will be enacted. But a watered-down version has about a 60 percent chance of passing next year.

Impact on India’s IT sector

The tax will hit firms managing Global Capability Centers (GCCs), BPOs, IT services, and consulting operations.

Is India’s service sector too much dependent on the United States? Yes. Indian IT Giants like Infosys, HCL, TCS, and Wipro rely heavily on the American market. Estimates suggest India’s service sector earns about $224 billion from outsourcing. More than half comes from the US alone. A report published by Mint suggests the percentage is 70!

Companies outsource because it saves a lot of money. But with a 25 percent tax, the business model may no longer make sense. And any reduction in outsourcing work would directly lead to job losses in India, causing more pain for the economy.

Raghuram Rajan HIRE Act warning

Last month, former RBI Governor and Economist Raghuram Rajan warned that the HIRE Act poses a bigger threat to India than the H-1B visa restrictions. This is Trump’s way of extending tariffs from goods to the services sector. The bill is not good news for India. It will increase the compliance burden for companies outsourcing work to the country.

India should act fast

Besides India, countries like Ireland, Poland, the Philippines, and Israel will also be affected by Trump outsourcing tax. Raghuram Rajan suggests India should negotiate a trade deal quickly. Else, the country might face its worst export setback yet.

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