The Budget proposal for bringing units operating in special economic zones (SEZs) under the minimum alternate tax (MAT) bracket will impact small and medium enterprises, software representative body Nasscom on Monday said.
"Last year, it was clarified that under Direct Tax Code (DTC), SEZ units set up till 2014 will continue to get profit linked tax exemptions. Imposition of MAT at 18.5 per cent with an effective rate of nearly 20 per cent, nullifies the impact of any such incentive," Nasscom President Som Mittal said.
This will be a deterrent for small companies in tier II and III cities, which are looking at expanding in SEZs, he added.
IT companies have been migrating to SEZs as tax breaks under the Software Technology Parks of India (STPI) scheme will come to an end on March 31, 2011.
Under the Software Technology Parks of Indian scheme, IT firms operating in these units had been given a 10-year tax break that was to end in 2010. In the FY 10 Budget, however, this was extended to March 31, 2011.
The IT industry has been asking for an extension of one more year until the Direct Tax Code is implemented in 2012.
SEZs have a 100 per cent tax exemption for a period of five years and 50 per cent exemption for another five years.
"There will be a significant impact on both SEZ developers as well as the units operating in SEZs...The attractiveness of SEZ units will drop significantly," Mittal said.
Imposition of MAT on SEZs will impact cash flows, said Genpact President and CEO Pramod Bhasin.
Large IT players such as TCS, Wipro and Infosys have moved a large part of their operations to SEZs.
The IT industry had also been seeking a roll back in MAT after it was increased from 15 per cent to 18 per cent last year. However, it has been increased to 18.5 per cent this year.