The $31.6 billion (2006-07) IT and related services sector feels betrayed by the levy of minimum alternate tax, fringe benefit tax on employee stock option plans, dividend distribution tax and levy of service tax on commercial leased space -- all at a time when it was expecting many sops, including the extension of the Software Technology Parks of India scheme beyond 2009.

The sector, which pegs revenue from software exports at $60-75 billion by 2010, is expected to shell out additional Rs 200-350 crore (Rs 2 to Rs 3.5 billion) as MAT for 2007-08 if the proposed effective MAT rate of 11.33 per cent is passed by Parliament.

MAT is payable on profits earned on offshore revenues (work done from India centres) and not on work which will be done in a special economic zone since this is covered under Section 10AA.

Data culled out from Capitaline show that around 95 listed and unlisted IT companies (which were to enjoy a tax holiday on revenue from exports at least till 2009) have paid a tax of Rs 383 crore (Rs 3.83 billion) in 2005-06 at a rate of 7.09 per cent of the pre-tax profits of Rs 5,400 crore (Rs 54 billion).

Had the current MAT rate been effective in 2005-06, these firms would have had to pay Rs 611 crore (Rs 6.11 billion) -- which amounts to additional Rs 228 crore (Rs 2.28 billion). For calculation purposes, we assume the profits are at the same level as in 2005-06.

While this will not impact IT majors, such as Infosys Technologies, Wipro, Tata Consultancy Services, Satyam Computer and Patni Computer, in a big way since they currently pay tax well over 11.33 per cent, it is bound to tell on the bottom lines of companies like HCL Technologies, Cognizant Technologies, Teledata Information, Rolta India and Tech Mahindra.

Sandeep Arora, lead executive, Accenture Delivery Centre for Technology, India, says: "For big IT firms, the impact will not be much since they are already paying 12 per cent tax. However, the introduction of MAT will impact the net profit of small and medium-sized IT firms."

Nasscom has termed the MAT proposal as a "regressive step that withdraws the government's commitment to provide tax incentives till 2009, on the basis of which companies have made their business plans and investment decisions."

S Mahalingam, chief financial officer, TCS, maintained: "The introduction of MAT has re-booted the assumed benefits that this sector was to enjoy until 2009. The IT industry does pay tax in other geographies currently, but it remains to be seen whether the MAT burden can be off-set (effective tax rate on a consolidated basis for all IT-ITeS companies is currently around 10.9 per cent) to some extent."

Suresh C Senapaty, CFO, Wipro, concurred: "The points on MAT and FBT (should have been) considered from a perspective of globally competitive, Sunrise Knowledge Industries." Pradeep Udhas, global partner in charge, sourcing advisory, KPMG, said: "The government can benefit much more from a larger exports earnings which can create a bigger forex kitty. Besides, it also needs to invest more in higher education and research level study to be a front-office (rather than just back-office) enabler."

For HCL Technologies, the MAT burden will be around Rs 63.41 crore (Rs 634.1 billion) as it has paid tax of Rs 10.67 crore (Rs 106.7 billion) in 2005-06 at the rate of 1.63 per cent of the pre-tax profit of Rs 653.83 crore (Rs 6.53 billion). Cognizant Technologies will fork out Rs 38.64 crore (Rs 386.4 million), Teledata Rs 13.85 crore (Rs 138.5 million), Rolta India Rs 11.93 crore (Rs 119.3 million) and Tech Mahindra Rs 9.77 crore (Rs 97.7 million).

Smaller companies such as Mastek, Aztec, MphasiS, Cranes, i-Gate too will be adversely impacted as their effective tax rates are between 5 to 10 per cent.

Further, there's the fringe benefit tax proposal on employee stock ownership plans, where the offer price is lower than the market price.

Kris Gopalakrishnan, President, joint MD & COO, Infosys Technologies, noted: "The FBT levy on stock options adversely affects one of the major employee retention tools for the IT sector."

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