The governments decision to extend minimum alternative tax (MAT) to IT services companies could result in companies shelling out $800 million to $1 billion.

Depending on the extent of offshore and onsite work, the tax implication could be an average of 2-4% for industry-wide revenues. This translates into a tax outgo of at least $800 million to $1 billion on account of MAT for the industry, says the CFO of one of Indias largest IT services companies. Rajiv Anand, associate director of PWC agrees that the implication of MAT for a single year could well be more than $800 million. We see MAT as a cash flow issue but not a lost case, he said.

Since the government allows tax payments on account of minimum alternative tax to be used to offset future tax liabilities (post sunset clause of 2009), it is unlikely to have a major bearing on the earnings of companies, says the chief financial officer of an IT services major.

A Morgan Stanley analysis notes that while minimum alternative tax would increase the effective tax rate by 4-5% for most companies, there will be no P&L impact as these can be recognised as deferred tax assets in the balance sheet. Since MAT payment can be carried forward to future years, companies can take credit against future tax liabilities that arise after March 2009. For Infosys, the net tax impact will be 1.5% of revenues, said Infosys chief financial officer V Balakrishnan.

Currently, the companies pay taxes in overseas geographies and therefore minimum alternative tax on onsite income would be completely offset by these tax payments. The companies pay no or little taxes on offshore income. MAT on such income can be offset partially by the taxes these companies pay on interest income and on profits obtained from clients in India. There will be a net tax liability, however, said the Morgan Stanley report.

As the government allows tax payments on account of minimum alternative tax to be used to offset future tax liabilities and since the current tax exemptions for IT companies end in FY2009, these IT companies should be able to transfer the current MAT amount to the balance sheet as deferred asset, resulting in zero impact to the P&L. There will be a small cash flow impact, however. Essentially, tax outflows post-2009 will get pulled forward.

Its just a cash flow issue. But companies feel deceived as the IT industry was declared tax free till 2009, Bharat Varadachari, tax partner at Ernst & Young, said. Indias largest software company TCS margins will be impacted by 1.6%, says company CFO S Mahalingam. The overall industry impact should be in that range. But MAT will only be an asset for us rather than an object in the profit and loss statement, he said.