The award is a one-year extension to an existing IT outsourcing industry tax break, due to expire in 2009, which has helped the country attain its status as world leader for low-cost IT service delivery.

The extension is an indication that the Indian government has become anxious that foreign investors may begin to look at alternative sourcing locations such as the Philippines and Vietnam, which also offer tax breaks.

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But Nick Mayes, senior consultant at IT services research consultant Pierre Audoin Consultants, says phasing out tax breaks would not cause an exodus of Indian suppliers.

“Even if they can find cheaper labour or more generous tax incentives in other countries, they will struggle to find a similarly large supply of technical and language skills,” he says.