In a move to placate foreign investors, the Central government has accepted the recommendation of a high level panel that minimum alternate tax (MAT) should not be imposed on FIIs retrospectively.
The government on Tuesday waived off retrospective imposition of MAT on capital gains prior to April 1. The move is likely to give a boost to the stock market.
MAT has been levied on all companies except those in infrastructure and power sectors, since late 1980s. The tax department had issued notices to FIIs demanding payment running into hundreds of crores. Five FIIs had moved court challenging the demand.
Making the announcement, Finance Minister Arun Jaitley said the government had accepted the recommendations of a panel set up to examine the issue, and said he would make the change permanent through legislation in the next Parliament session.
"Confidence among investors could be a consequence of this," Jaitley said.
This move comes even as the Centre led by Prime Minister Narendra Modi has suffered a series of political setbacks which have slowed his reform agenda.
Tax consultants Deloitte hailed Tuesday's decision, calling it a bold step considering the fact that it could cost the government revenue at a time when the finance ministry is trying to cut its fiscal deficit.
"The decision will also help to further the government's position that it discourages tax terrorism and welcomes foreign investment in India," said Rajesh Gandhi, a partner in Deloitte Haskins & Sells LLP.
India posted lower-than-expected economic growth of 7% for the June quarter on Monday, adding to a growing sense of pessimism after opposition parties forced the government to drop land legislation to make it easier for government and industry to acquire land for development.
Jaitley said that pending the change in the income tax law, a notice would be circulated to tax officers ordering them not to issue any more claims under the levy known as MAT.
On September 29, SC is due to hear a legal challenge filed by Mauritius-based Castleton Investment Ltd against the government over a number of tax-related issues, including on whether MAT can be imposed on foreign investors.
It was not immediately clear if the hearing will still go ahead, given that the government's move on Tuesday would seem to take the wind out of the sails of investors' main complaint.
(With inputs from Reuters)
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