India’s IT-ITES, Contract Manufacturing And Pharma Sectors Likely To be Hit Most By the US Tax Reform

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India’s IT-ITES, Contract Manufacturing And Pharma Sectors Likely To be Hit Most By the US Tax Reform
India’s IT-ITES, Contract Manufacturing And Pharma Sectors Likely To be Hit Most By the US Tax Reform

The US Senate passed President Donald Trump’s Tax Cuts and Jobs legislation earlier this week, a landmark tax reform bill that once enacted is likely to result in $1.5 trillion in tax cuts for the country, and also impact economies worldwide including India’s.

The most important change effected by the bill is the corporate tax being cut from 35% to 21%, which will come into force from January 1, 2018.

The bill also includes several incentives to bring back capital to the country and discourage capital from moving to offshore sites. It proposes allowing companies to write off the cost of equipment purchased in an attempt to restrict companies from moving their manufacturing operations to cheaper offshore hubs like China, Brazil or south east Asia.

Speaking on passage of the bill, Trump noted that he had campaigned on the fact that America was not going “lose companies to other countries” any longer. He stated that with companies coming back to the country, “it means jobs,” and growth of new companies.

He also pointed out that the law will help bring back at least $4 trillion of American capital currently frozen overseas.

Territorial System of Taxation Introduced

Experts believe that the major Indian industries that are likely to see an impact of this bill are IT-ITES, contract manufacturing and pharma.

The draft law’s provisions seek to make the US a far more attractive option for American companies to add gains and could possibly affect transfer pricing policies.

With the new legislation, a territorial system of taxation has been introduced. Here the basic principle is that corporations are dissuaded from retaining profits in their subsidiaries of foreign lands. Corporations can bring back their profits from other countries into US after paying a one-time tax.

The legislation clearly aims to generate jobs in the US market and make outsourcing difficult for the American companies.

For Indian companies, the federal tax outflow will see a drop for their US operations. Some sectors that are likely to be impacted as a result are IT-related services, BPO, textiles and pharmaceuticals.

The law also provides opportunities for Indian businesses to increase investment in their US units and set up manufacturing operations in the US. However the reverse, investments by US companies in India may reduce as the bill withdraws tax advantages for companies who move operations away from US’ shores.

Another important change is allowing maximum deduction of dividends received by a US stakeholder from foreign firms including those in India.

As a result of this, subsidiaries of US companies in India will be encouraged to send back larger dividends to the US although the Indian Dividend Distribution Tax currently over 20 per cent may act as a deterrent.

NRIs May Benefit From Proposed individual Tax Cuts

While the nearly four million strong NRI population in the US will benefit from the  proposed personal tax cuts, it might not be permanent. The tax cut lasts for 10 years and income taxes for individuals are expected to rise for 57 per cent of America’s middle-income class.

Under the new laws, the highest earners will pay 37 percent as opposed to 39 percent earlier. The seven income tax brackets being introduced are:  10, 12, 22, 24, 32, 35 and 37 per cent.

The existing $1 million cap has been slashed to $600,000 for couples, and the standard deduction has been doubled to $12,000 for individuals and $24,000 for married couples. The personal exemption clause, currently at $4,050, has been dropped.

It has also withdrawn the unlimited federal deduction being offered for state and local income and sales taxes. Deductions for a maximum of $10,000 will now  be allowed in combined income , property or sales taxes.

 

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