CHENNAI: The Union Finance Minister, P. Chidambaram, has finally decided to touch the profitability and the investment opportunities that the IT and IT-enabled Services (ITeS) companies have been enjoying in order to stay globally competitive, according to IT and ITeS companies.

The Union Budget for 2007-08 has focused on certain core areas such as Minimum Alternate Tax (MAT), Service Tax on commercial leases premises and ESOP, from which the IT and ITeS companies were so far exempted.

The Government imposed MAT of 11.23 per cent in 1996-97 but excluded several sectors from its purview till March 2009. Now it will be applicable to all corporate incomes and IT and ITeS companies would come under this purview.

R. Chandrasekaran, President and Managing Director, Cognizant, feels that "frequent modifications to tax exemption provisions upset business plans and investment direction of companies. While the industry was expecting an extension of tax holiday beyond 2009, this modification of the tax provision is counter-intuitive."

Mr. Chandrasekaran said this would severely affect small and medium enterprises, which constitute a large proportion of the IT industry.

The Finance Minister has extended the Service Tax to certain areas such as renting of immovable property for use of commerce or business. Mr. Chandrasekaran points out that it will have a direct bearing on the cost of operations and will adversely impact small and medium sized companies, specifically in the IT and BPO segment which are large consumers of leased space.

The most attractive proposition for the corporate world so far has been "Employees' Stock Option Plan (ESOP)," which has now come under tax net. Mr. Chidambaram is of the view that ESOP is one of the fringe benefits that a company provides to employees. So it has to be taxed under the "Fringe Benefit Tax."

Ashank Desai, Non-Executive Chairman, Mastek, said: "the inclusion of ESOPs under FBT will add to the challenges being faced by employers in knowledge-intensive industries in attracting and retaining world-class talent."

On the e-governance front, the Executive Director, MAIT (the apex body representing IT hardware, training and R&D service sector), Vinnie Mehta, welcomed the increase in budgetary allocation for e-governance.

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