The proposal by finance minister P Chidambaram to extend the minimum alternate tax (MAT) to information technology companies in Budget 2007-08 could well be the governments way of telling them that the tax holiday on export profits would continue beyond 2009. As things stand, software companies will get a refund on the MAT paid over the next two years as credit in the very first year of graduating to the 30%-plus corporate tax regime.

This is how it works: MAT would be levied at 11.33% on the book profits of IT companies for 2007-08 and 2008-09. But the existing tax holiday for these companies available under Section 10A and 10B of the Income-Tax Act for profits earned from export activities expires at the end of assessment year 2008-09. So, the companies lose the shelter of MAT and move to the higher 33.99% corporate tax rate (including education cess and surcharge) in 2009-10.

However, Section 115JAA of the I-T Act allows companies tax credit for MAT paid, immediately upon graduation. Simply put, this means the cumulative MAT paid can be set off against the regular tax liability. The credit is, of course, restricted to the difference between the tax under normal provisions of the income-tax act and the cumulative sum payable under MAT provisions.

As the chart shows, a notional company that pays MAT of Rs 28.33 crore (the entire sum it will pay the government as MAT in the next two years) will get full credit for this amount in 2009-10 against the corporate tax liability of Rs 67.98 crore.

Income-tax experts like Shyamal Mukherjee, executive director, PricewaterhouseCoopers, have interpreted the clutch of provisions as an indication the tax holiday for IT companies will continue beyond 2009. Unless the tax credit provisions are changed in the next Budget, IT companies have no reason to be unhappy, he said. The cash outgo will return as MAT credit, he said. The finance ministry has estimated it could earn over Rs 4,000 crore each year from MAT on IT companies.

MAT was extended in Budget 2007 to cover section 10A and 10B IT companies like Infosys, Wipro, TCS and others. Advisor to finance minister Parthasarathy Shome has said the extension was necessary to ensure a level playing field.