China, keen to end India's dominance in the outsourcing industry, today announced it will not levy operating taxes on offshore service outsourcing business in 21 of its key cities till 2013 to promote growth of the industry.

The five per cent operating tax exemption will run from July 1 this year until December 31, 2013, the Chinese government said.

The 21 cities covered are Beijing, Tianjin, Dalian, Harbin, Daqing, Shanghai, Nanjing, Suzhou, Wuxi, Hangzhou, Hefei, Nanchang, Xiamen, Ji'nan, Wuhan, Changsha, Guangzhou, Shenzhen, Chongqing, Chengdu and Xi'an.

According to a joint statement released by the Ministry of Finance, the State Administration of Taxation and Ministry of Commerce, offshore service outsourcing income refers to service revenue arising from contracts signed with offshore entities for providing information technology outsourcing (ITO), business processing outsourcing (BPO) and knowledge processing outsourcing (KPO) services.

Those already taxed on offshore service outsourcing income since July 1 would be refunded within this year, the official Xinhua news agency quoted the statement as saying.

China's service outsourcing industry posted a 21 per cent year-on-year increase to USD 23.6 billion in 2009, according to a recent report by Deloitte.

Last month, accounting firm KPMG had said China had overtaken India as the primary destination of outsourcing and shared services for Asia-Pacific companies after netting business to the tune of USD 20 billion.

The KPMG survey, which covered 280 senior company executives across Asia, showed that China's outsourcing and shared services are rapidly expanding -- winning a substantial market share over India and other regional destinations.

"Though, at the moment, the country has still not reached the level of maturity seen in India, the growth of China's outsourcing market is significant. Many Western companies may still see India as their location of choice, but for executives within Asia Pacific the message is clear -- China is now leading the way," Edge Zarrella, global head, IT Advisory, KPMG China, was quoted as saying.