Outsourcing Costs in India - Taxes

The direct cost of outsourcing services in India is primarily determined by employee compensation, but taxes also play a role. In most cases taxes are not directly paid by the end customer, but are absorbed into a vendors cost structure and are passed on in their pricing. Just because you won’t always see taxes on your vendor’s invoice does not mean you are not bearing the cost.

Taxes come in 2 key flavors; corporate and indirect. The corporate tax rate in India for domestic companies has declined from 36.5% in 2005 to 34% in 2008 (foreign companies pay a higher rate of 42%). This compares favorably with the US where corporate tax rates are 40%. Note that similar to the US, there are numerous potential deductions and incentives in India that can impact a company’s tax expense.

When compared to other offshore locations, India’s corporate rates are in the middle of the pack. For example, India’s taxes are above that of China, Poland and the Czech Republic, but inline with Canada and the Philippines.

Indirect taxes, such as value added taxes, also add to a company’s tax burden. In India, indirect taxes vary between different products and service and across states, but averages 12.5%. This is higher than in the US and Canada, but is comparable or lower than other offshore locations such as the Philippines, Poland, China, and the Czech Republic.

Overall, India’s direct tax structure is not overly burdensome and does not adversely impact India IT & BPO companies.

References & Resources
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