IT firms today said the proposal of the Direct taxes Code (DTC) bill to impose 20 per cent Minimum Alternate Tax (MAT) might prove to be "a dampener for the sector", especially if extended to special economic zones (SEZ).

MAT is imposed on profit making companies, which do not fall under the tax net because of various exemptions, and most IT companies fall under category.

IT bellwether firm Infosys CFO V Balakrishnan said if MAT is applied to SEZ profits, then it would be a dampener for the entire sector.

One industry observer said, "It is going to act as a dampener for the IT sector. Internationally, it is one-third of the regular rate. In India it is two third of the corporate tax."

According to the Bill, introduced in the Lok Sabha on Monday, developers have to notify their SEZs by March 31, 2012 and get them operationalised by March 31, 2014 to benefit from the existing profit-linked tax incentives.

SEZ units do not pay tax at least for the first 5 years of their operations. They also enjoy incentives such as exemption from dividend distribution tax, corporate tax waiver on export income for 15 years and exemption from MAT.

President of IT industry body Nasscom Som Mittal said the move would hurt small and medium businesses that make up for a major portion of the USD 50-billion software services export industry.

"The basis of SEZ was to help IT firms by providing tax sops and if SEZ also comes under the ambit of MAT, the whole purpose will get defeated (if the proposal is implemented)," Angel Broking Research analyst Srishti Anand said.

CFO at the IT firm CMC, JK Gupta said, "Though cash flow might become difficult for SMEs as they have a higher tax go."

Software Technology Parks of India (STPI) scheme, which provides tax holiday to IT firms, comes to an end in March 2011.

Software units coming out of the scheme would face a corporate tax rate of 30 per cent in April 2012, when the new DTC is expected to be applicable. They currently pay MAT at about 18 per cent.