NEW DELHI: The new value-added tax (VAT) rule introduced by the European Union from January this year, will make offshoring costlier for banking

and healthcare customers in the region by up to 15%, and squeeze margins of India’s top tech firms including Tata Consultancy Services (TCS), Infosys and Wipro.

According to outsourcing advisory firm Everest Group, some customers have already started renegotiating rates with Indian suppliers. “Our analysis shows that this could impact the billing rates by 10-15%,” said Everest Group vice-president (global outsourcing) Amneet Singh.

Starting January 1,2010, the 27-nation bloc has imposed value-added tax (VAT) on services delivered from non-EU nations such as India, a move which will put a renewed squeeze on the profit margins of these tech firms.

Customers outsourcing IT and back-office work will be looking to extract better value out of their service providers to offset the financial implications of the tax, which could increase the cost of such projects by up to 25%, Nick Beecham, partner at UK-based law firm Field Fisher Waterhouse had told ET in an interview.

The new VAT regime define the place of supply as the buyer’s location hence making offshore service VAT liable on verticals such as banking and financial services, healthcare and education.

As per the latest study by Everest group on the performance of global outsourcing business in the fourth quarter of 2009, while prior to imposition of VAT a buyer could save 30% on the costs, its savings may take a hit of 10-15% assuming that the seller pass on the entire cost burden arising from tax liability.

“Suppliers will hold a stronger position in the existing contracts, as with the new tax regime in place the billing rates will be up for review and suppliers would be able to influence buyers to change it. Since business case for offshoring has become expensive, buyers on the other hand will be forced to reconsider their overall outsourcing strategy for new contracts,” Mr Singh said adding that the number of outsourcing deals may dip going forward as companies incorporate new cost element into their budget.

The upward movement in billing rates may be more damaging if suddenly revised, as in the normal course-billing rate goes up largely due to delivery costs going up or issues related to wage inflation.

But, increase in rate because of VAT does not leave enough room to accommodate inflation, Mr Singh said adding that new tax rule in EU may again make global outsourcing services providers look at North American economy, which is recovering. Europe accounts for over a quarter of the $60-billion revenues of the Indian outsourcing industry currently.

Meanwhile, countering the rationale for high billing, Nasscom president Som Mittal said, “VAT ruling which came into effect in January was to harmonise tax regime across EU as every country including Germany, Belgium and France had their own VAT structure. Since an Indian outsourcing services provider does not cater to the end user, an EU customer may offset VAT being paid to the former against VAT charged to the end users. So there’s no question of pressure building up on billing rates.”

The fourth quarter of 2009 reported signs of improvement in business sentiment and revival in the outsourcing market as the number of outsourcing deals increased 21% in ITO and 25% in BPO sector, led by US and Europe, according to the Market Vista report from Everest.