The government on Tuesday accepted the high level AP Shah panel's recommendation to not impose minimum alternate tax (MAT) on overseas portfolio investors retrospectively, providing a big relief to foreign institutional investors (FIIs).
Finance minister Arun Jaitley said the panel headed by Law Commission of India chairman AP Shah submitted its final report on the issue of applicability of MAT on capital gain made by FIIs prior to April 1, 2015, on August 25.
The report has been accepted, he told reporters at late evening press conference in the Capital.
Jaitley said an amendment to the Income Tax act to reflect the same will be made possibly in the winter session of parliament in November/December.
While the issue had riled foreign portfolio investors, Jaitley had in his Budget for 2015-16 exempted FIIs from the levy from April 1.
"What applies post April 2015, that is no MAT on capital gain on FIIs, will also apply on pre-April 2015," Jaitley said.
Foreign investors have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds. MAT has been levied on all companies except those in infrastructure and power sectors, since late 1980s.
Historically, foreign investors have not paid this tax because it was believed that only Indian companies were subject to it. In 2010, a tax tribunal ruled that MAT was not applicable to companies that don't have a permanent establishment in India.
In 2010, Mauritius-based investment firm Castleton Investment approached the Authority for Advance Rulings (AAR) to get confirmation that it was not required to pay MAT on a transaction it wanted to execute.
However, AAR in 2012 ruled that even foreign companies are subject to MAT.
FIIs had argued that MAT is applicable only to domestic companies that had their base in India. By virtue of not being established in India, they should be "exempted".
FIIs also contend that there was inconsistency in the application of MAT as ever since it was introduced, FIIs were always exempted from it and hence, arbitrary application should be avoided.
After FIIs started getting notices for MAT payments, the stock market had reacted adversely on concerns that foreign investors may pull out in a big way.
The markets have been very volatile for the last few weeks and the Sensex today tanked 587 points to close at over 1-year low due to intense selling. In August FIIs sold shares worth record Rs 17,000 crore.