Multinational companies began setting up outsourcing units in India a few years ago, lured by low labor costs and special tax exemptions. However, the Indian government recently decided to begin taxing revenues on core business profits when the tax exemption agreement expires in 2009. Core business is defined as that which generates major savings for the foreign company, such as a telephone software support call center. The tax applies to so called captive business process outsourcing (BPO) units, which are subsidiaries of a foreign parent company.

The National Association of Software and Service Companies (NASSCOM) reports that several major companies have canceled or delayed plans to establish operations in India in light of the decision. NASSCOM president Kiran Karnik fears the new taxes will quell growth in Indian outsourcing, a booming industry that has created thousands of jobs in the last few years. "It is not a good move and has come at the wrong time," he said. "This is the time to boost the sector, not tax it." He added, "All employees in call centers pay income tax. The contribution to the economy through more foreign investment, higher employment, and taxes paid by BPO employees will far outstrip any taxes collected from MNC´s captive units, or third party BPO firms."

In response to protests from business leaders and lobbying groups, the government ruled that non-core, or incidental, services, such as the conclusion of contracts, will become tax-exempt. It may be irrelevant, however, if the tax on core business deters investment from multinationals. China and the Philippines, which also offer tax breaks, are seen as competitors in the outsourcing market.