by Roger Russell

The Indian tax preparation outsourcing industry is facing a challenge: the political conflict and potential of war between India and Pakistan.

The overseas threat may be dampening CPAs’ inclinations to outsource their tax prep work at a time when two India-based outsourcers have reported making headway in the growing industry. Both companies report that practitioner concern over the ongoing conflict has resulted in some firms delaying a decision to outsource data to the subcontinent.

"Events like this slow down the decision-making process," said K.N. "Vaidy" Vaidyan-athan, business head of Advantage MOTI, a Boston and Bombay, India-based outsourcing firm. "People may hold back for a month or so." It doesn’t impact the underlying business opportunity, but it slows down the process," he said.

"Firms already using India did not stop because of the political scenario, but some firms on the verge of beginning a relationship decided they might want to wait," he related. "Three clients who were planning substantial outsourcing were to visit us in June, but the visit got pushed back."

Kishore Mirchandani, president of ItAccounts, a New York and Bangalore, India-based company, agrees. "The question has come up a lot of times this year, but the way things stand, even if there is a war, it’s in the northern area and it wouldn’t affect our operations - we’re in the south, far away from where the conflict was supposed to happen," said Mirchandani.

"Even if there is a conflict, we expect it would last only one to two weeks. The rumblings will always be there, but the major risk of war has been mitigated," he explained.

"There’s no question the conflict could become a negative development," said Allan Koltin, president of Practice Development Institute, a practice management consulting firm based in Chicago. "But I like to think that India is stable enough that it will survive and its business community is substantial enough so this won’t bog down."

ItAccounts and Advantage MOTI are two of the pioneers in the tax outsourcing market, and both began preparing outsourced returns last tax season. "Tax return outsourcing will be a very hot area," said Koltin. "Accounting firms are just beginning to uncover it. Firms have struggled just to be competitive on the low-to-medium-end 1040 forms. This is an opportunity to get the best and the brightest accountants at wage scales so much less than here."

Both firms tout additional advantages beyond the obvious cost savings in tax-prep outsourcing. "Why employ a staff year round when your requirements are seasonal?" said Vaidyanathan. His firm, Datamatics Technologies, has been involved with Business Process Outsourcing for the last 10 years. Advantage MOTI, a division of Datamatics, was set up last year to provide outsourcing services to CPA firms.

"In the U.S. firm, junior staff who review a return are not CPAs. In India we can employ qualified accountants to do this because of the wage differential. There’s also a reduction in turnaround time by leveraging time zone differences," said Vaidyanathan.

He estimates the savings at from 50 percent to 60 percent of out-located processes. "Our services wouldn’t make sense to firms that do a few hundred returns. Anyone who does more than 500 to 1,000 returns will start seeing benefits," he said. "A firm that does several thousand returns can start seeing benefits when it outsources 15 percent of them. For example, if they do 10,000 returns and outsource 1,500 to us, they’ll see benefits of at least a couple of hundred dollars per return."

The estimates are similar for ItAccounts. "Outsourcing cuts down on processing costs by as much as 50 percent. The break-even point for using our services would be 1,000 returns," said Mirchandani.

Last tax season, both firms serviced small to midsized clients, and each provided outsourcing for at least one firm in the Accounting Today Top 100.

Mirchandani said that security of data is not an issue. "We have the experience, and we’ve taken care of all security aspects from the client’s perspective. We have both a private line and satellite hookup for the transmission of data."

Likewise Vaidyanathan, for whom security is no impediment to outsourcing. "What is moving to India are only images, the original data remains with the CPA firm. No data ever gets lost." He noted that GE, Ernst & Young, PwC, American Express and British Airways, all outsource accounting services to their Indian offices or subsidiaries.

The type of software that clients use doesn’t matter, as long as it’s Web enabled, according to Mirchandani. "The document imaging software we use resides on our server in New York. When the CPA firm scans in the shoebox of information, it goes into our server. The offshore processing center in Bangalore accesses the server in New York and looks at the images, then indexes the images so the filing is done in the same manner that the CPA firm desires."

"After we complete the index, we log onto the CPA firm’s tax program, so the India office actually completes the return on the CPA firm’s server. We do one round of quality control - preliminary review - in India, and e-mail the firm when a batch is complete. The firm can then print out the return in the CPA office, or review it on the screen."

"Tax return outsourcing gives the accounting firm the chance to keep its preparation business and remain competitive," said Koltin. "Barring any escalation of the conflict in that region, I wouldn’t be surprised if this becomes the norm in the next couple of years.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access