US President Donald Trump has hinted at retaliating against countries that tax digital services from American technology companies. That could be a problem for a nation such as India and its stable of tech players.
The US has already caused a ruckus among its trading partners with sweeping tariffs, which cover hard goods and exempt services. But there is a precedent for taxing the latter, courtesy of the EU's digital tax regime implemented this year.
Mr Trump has railed against what he sees as unfair treatment of American tech companies – the likes of Apple, Google and Microsoft – and has fired a warning that he may follow the EU's lead.
While the US remains the world's biggest exporter of services, India's technology sector has carved its own niche and has a substantial business and expat base in America that could run into speed bumps, tariffs pending.
Unfamiliar territory
Already hit with US tariffs of 50 per cent – the highest for any Asian nation – India also faces having to work out how to handle levies on services, should it come to fruition.
The combined situation is “accelerating India’s diversification of trade partners … already visible in India’s finalised trade deal with the UK and ongoing negotiations with the EU and Australia”, Paul Turner, senior executive officer at Abu Dhabi-based broker Naga, told The National.
The general trade tensions have also highlighted the risks of over-reliance on the American market, resulting in moves by countries to “secure new markets and shielding the economy from US protectionism”, Mr Turner added.
While the US tariffs are driving a sharp strategic divide across India’s export sectors, its IT services continue to expand globally, driven by its pool of skilled and cost-effective talent.
However, the indirect impact of these tariffs, or potentially a new set of tariffs on services, could severely disrupt India’s tech giants such as Tata Consultancy Services, Infosys and HCL.
In their latest quarterly reports, Tata Consultancy Services and HCL generated about 51 per cent and 56.5 per cent, respectively, of their revenue from the US, while Infosys gained 56.5 per cent its revenue from North America.
“This clearly indicates the level of dependence of these Indian IT giants on the US, making any potential tariffs a significant threat to revenues,” Vijay Valecha, chief investment officer of Dubai-based Century Financial, told The National.
“With higher import tariffs across the board in the US, general business operations may face higher input costs, which could lead to lower spending on outsourcing technology services to India,” Mr Valecha added.
India may already have a blueprint: its gold and jewellery industry, among those facing a big hit from the tariffs, has already pivoted to the Gulf – a place Indians know well.
Familiar ground
The Gulf presents an opportunity, especially as its largest economies have established decades-long relations with India, forming the base for consistent investment and the influx of talent.
Indian tech companies, including Infosys, Wipro and Tata Consultancy Services, have long had a footprint in the region. This is especially true of the UAE, the Arab world's second-biggest economy, which has technology at the forefront of its ambitious, innovation-driven economic goals.
Any move “is therefore not just about opening new revenue streams, but about creating a more geographically balanced and resilient business model that can withstand global uncertainties and support sustainable long-term growth”, Joseph Dahrieh, managing principal at brokerage Tickmill, told The National.
Analysts have already flagged the tariffs' impact on other sectors. For instance, revenue for ready-made garments would nearly halve this year as these companies currently get 40 per cent of their revenue from the US, causing a decline in profitability and hitting credit metrics, according to Mumbai-based Crisil Ratings.
Cross-border trade in digital services has been booming much faster than goods, even well before the tariffs, said Simon Evennet, professor of geopolitics and strategy at the IMD Business School in Stockholm.
Tech companies such as those in India have taken advantage of this, “finding creative ways to expand offerings to customers who have iPhones, smartphones and can engage through those media”, Prof Evennet told The National in a recent podcast.
The potential moves of Indian firms echo what their Chinese counterparts have done, pivoting to the Global South amid rising US tariffs since 2018. This trend is expected to continue as companies look to diversify sales away from the US and expand to other markets with stronger growth prospects than at home, S&P Global said in a report this month.
China exports more than 50 per cent to the Global South – comprising Africa, Latin America, Asia and Oceania (excluding Japan, South Korea, Australia, New Zealand and Israel), generating about $1.6 trillion compared to $1 trillion from the US and Western Europe combined, data from New York-based S&P shows.
In 2024, US exports to India were valued at $41.5 billion, while imports hit $87.3 billion, resulting in a $45.8 billion trade deficit, a 5.9 per cent annual increase, according to the US Census Bureau.
The US has not run a trade surplus with India since data tracking began in 1985 – and that is likely to continue this year. In the first half of 2025 alone, the trade deficit is already more than three quarters of last year's at $34.3 billion, the data shows. It is unclear if the tariffs will substantially drag down that deficit.
Cities with strong technology strategies and significantly lower tax regimes may be the answer for countries such as India looking to realign their plans.
Dubai, Bahrain and Riyadh are competing to lead in FinTech and digital banking. Energy giants Saudi Aramco, Abu Dhabi's Adnoc and QatarEnergy are integrating AI and the Internet of Things into their operations, and Saudi Arabia’s Neom and Dubai’s smart city initiatives need to rely on highly connected, data-driven systems.
“India is navigating a delicate balance between external pressures and domestic priorities,” Mr Turner said.
“Rising US tariffs create tension, yet India is simultaneously cultivating broader regional and global trade ties to preserve economic momentum.”
