US HIRE Act: What a 25% Outsourcing Tax Could Mean for Indian IT Stocks and Market Sentiment

The US has introduced a sweeping new bill that could shake up global outsourcing. The Halting International Relocation of Employment (HIRE) Act, tabled in September 2025 by Ohio Republican Senator Bernie Moreno, seeks to impose a 25% tax on payments made to foreign firms for services consumed in America. These “outsourcing payments”—covering fees, royalties, and service charges—would also lose their tax deductibility, hitting US companies dependent on offshore IT and business services.

The bill proposes using the tax revenue to create a Domestic Workforce Fund, financing training and apprenticeships for American workers. If passed, the measures would take effect for payments made after 31 December 2025, targeting cost-driven offshoring that, according to backers, hurts US graduates and weakens local employment.

What Does the HIRE Act Mean for the IT Sector in India?

Here is how the HIRE Act affects the Indian IT sector:

• Revenue Exposure

India’s IT services industry derives over 60% of its export revenues from the United States, translating to approximately $150 billion out of the $250 billion sector size. Top firms like Tata Consultancy Services (TCS), Infosys, and Wipro report US-centric revenue shares of 50–60%, with TCS alone earning 48.2% of its total revenue of $30.18 billion from North America in FY 2025.

The proposed 25% tax on outsourcing payments directly targets this revenue stream. If enacted, it could inflate client costs by up to 46% when the disallowance of deductions is factored in. This jeopardises deal renewals and new bookings, especially in cost-sensitive verticals like Banking, Financial Services, and Insurance (BFSI) and retail, which dominate US contracts.

• Impact on Operating Margins

The HIRE Act could compress operating margins by 500 to 1000 basis points for Indian IT firms, according to Merisis PMS estimates. Mid-tier firms such as LTIMindtree and Mphasis, which operate at 12–15% EBIT margins, are particularly vulnerable. In contrast, large caps like Infosys, with 20–22% margins, may absorb shocks better but still face erosion.

The inability to pass on the full tax burden to clients, coupled with rising onshore staffing costs, will likely force firms to renegotiate pricing or restructure delivery models. This margin squeeze could trigger earnings downgrades and valuation resets across the sector.

• Deal Flow and Contract Structuring

The HIRE Act’s cost implications may lead US clients to defer or cancel offshore-heavy contracts. Analysts expect a significant decline in deal TCVs (Total Contract Value) over the next two quarters if the bill progresses. Contracts may shift toward hybrid or onshore-centric models, resulting in increased delivery costs. Moreover, anti-abuse provisions in the bill could invalidate current workarounds, such as US subsidiaries contracting with Indian arms, further complicating structuring. This could disproportionately affect firms with low onshore bench strength.

• Impact on Global Capability Centres

India hosts over 1,800 Global Capability Centers (GCCs), many of which serve US parent firms. These centres contribute $76 billion in direct output, with an additional $62 billion in exports. The HIRE Act’s broad definition of “outsourcing payments” may include intercompany service charges, potentially taxing internal transactions. If anti-abuse clauses apply, even captive centres could face cost escalation. This could prompt US firms to relocate their GCCs to tax-neutral jurisdictions, such as Poland or Mexico.

Alternatively, they may restructure GCCs into standalone entities with local revenue streams. Such moves would disrupt India’s GCC growth trajectory and reduce its strategic attractiveness for global firms.

Impact on Indian Stock Market & Sentiment

Here’s what could happen in Indian markets, especially for IT stocks, and what you might watch out for:

Short-Term Market Reaction & Volatility

• News of the Act has already caused jitters. Stocks with high US export exposure may see downward pressure on expectations of future earnings.

• Indexes heavy in IT stocks might underperform or show more volatility as market participants try to assess how much revenue or margin loss is likely.

• Derivative markets may see more short interest in IT names or sectors; put options may become more attractive hedges for those fearing downside.

Long-Term Investor Considerations

• Large-cap Indian IT players have several advantages, including established client relationships, the ability to shift their service mix, and greater financial strength to absorb margin hits. They might fare better.

• Mid-tier players, or those narrowly focused on labour arbitrage, will be more vulnerable. Investors will probably re-rate those companies downwards, which may trigger compression of valuation multiples.

• Some stocks may look attractive if priced for pessimism and if there is reason to believe they can adapt (automation, moving up the value chain, non-US diversification).

Sentiment & Foreign Flows

• Foreign institutional investors (FIIs) tend to respond to policy risks. A credible threat that a large chunk of revenue or profit could be taxed away might reduce enthusiasm or lead to capital outflows from IT stocks.

• On the other hand, any mitigation steps taken by Indian firms, or signals of support from the government, such as negotiating trade agreements and pushing back diplomatically, could help improve sentiment.

Conclusion

The US HIRE Act offers short-term plays for traders based on volatility, hedging, and likely correction in valuations. For long-term investors, the key will be identifying firms that can adapt, such as through automation, non-US markets, or higher-value services, and which are temporarily undervalued because the market has over-discounted their risk.

India’s IT story has dealt with disruptions before. This may be another test of how firms evolve. Valuations today may offer entry points, but they come with risk. Monitoring the progress of the bill, company disclosures, and how US firms respond will be essential in forming investment decisions.

Read more:

GST Reform: How India’s Two-Slab GST System Could Reshape Consumption and Compliance

Sources

Business Standard
News18
Staffing Industry Analysts
Business Outreach
The Economic Times
Inductus GCC
dun & bradstreet