India seeks tax deal for H-1B workers

Worried about protectionism, India presses ahead in effort to reach 'totalization agreement' with the U.S.

WASHINGTON - India's government and IT industry, worried about a rising tide of protectionism and looking to improve their ability to compete in the worldwide market, wants the U.S to stop collecting Social Security taxes from H-1B workers and their employers.

H-1B workers in the United States pay Social Security and Medicare taxes, but many that don't remain as permanent residents are unlikely to see any benefit from those payments.

The U.S. already addresses the issue under "totalization agreements" with nearly two dozen countries. Those agreements, under which foreign workers pay only the social security-like taxes due their home countries, are mostly with developed countries in Western Europe that have benefit systems roughly parallel to the those of the U.S.

Anand Sharma, India's minister of commerce and industry, said in an interview Wednesday that "it's important" for his country and the U.S. to sign a similar totalization agreement. "We have a large number of professionals who are making a significant contribution," to the U.S. social security system but are leaving the U.S. after five or six years, said Sharma. The "benefits don't kick in for 10 years so they all return [to India] after making a contribution without benefiting in any manner," he said.

A totalization agreement would be "mutually beneficial" for U.S. workers in India, Sharma added.

India has signed totalization agreements with other developed countries, which "could be used as reference benchmarks; we may have different systems ... but the objectives are the same," said Sharma. Among the countries India has deals with are France and Germany.

The National Association of Software and Service Companies (Nasscom), an Indian IT industry group, said that Indian firms and their employees are currently paying in excess of $1 billion annually in Social Security taxes and getting no benefit due to the absence of a totalization agreement with the U.S.

Depending on what would emerge from negotiations between U.S. and Indian officials, a totalization agreement could also cut payroll costs for Indian IT providers.

Daniel Costa, an immigration policy analyst at the Economic Policy Institute, estimates that the affected companies could save 14% on the labor costs associated with H-1B workers. "That would give companies another incentive to hire H-1Bs because that's an extra 14% of savings," he added.

The net savings for Indian firms would depend on how much they have to contribute to India's system.

Brijesh Nair, a civil engineer from India worked in Arizona using an H-1B visa and paid Social Security and Medicare taxes from 2006 through May of this year. Nair, who holds a PhD in civil and environmental engineering, recently returned to India to teach graduate level courses and said that he doesn't expect to benefit from the Social Security and Medicare taxes he paid.

Nair noted that he does benefit from India tax laws that don't require H-1B visa holders considered Non Resident Indians (NRI) to pay taxes in his home country. "That is one advantage of being a NRI," he said.

Nair said his retirement account could benefit greatly under a totalization agreement between the U.S. and India. "In India we have the concept called Provident Fund (PF), something very similar to 401K. If I can transfer my social security tax to my PF account, it is great," said Nair.

IT is becoming an increasingly important part of the trade negotiations with India. But the recent approval in Congress of a $2,000 fee hike targeted against offshore firms without any hearings or much warning blindsided the Indians.

In addition, the recent decision by Ohio to ban state contracts with offshore firms is seen as sign of advancing protectionism.

And there is a belief by some in India that President Barack Obama has turned Bangalore, the city, into a verb by equating it with offshoring and job losses.

In a nondescript building in Washington, 10 Indian and 10 U.S. officials gathered Tuesday on opposite sides of a large rectangular table to begin trade discussions.

"We have to move the process forward, no matter how difficult, no matter how painful," said Indian Commerce Secretary Rahul Khullar, in remarks at the start of the meeting, while U.S. Trade Representative Demetrios Marantis foresaw "solutions to our difficulties that can be win-win." Khullar and Marantis avoided specifics before moving behind closed doors.

With IT becoming an ever bigger part of India's economy, the country is unlikely to treat IT services as a completely separate issue. For example, IT could be linked to other trade deals, such as purchasing aircraft from Airbus instead of Boeing.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His e-mail address is

Copyright © 2010 IDG Communications, Inc.

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