India moves to resolve tax row, mollify foreign investors

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India moved on Thursday to mollify foreign investors who were hit by bills for several years of taxes on previously untaxed gains, triggering a sell-off in financial markets.

Overseas funds chalked up their biggest single-day sales of Indian shares and bonds in a year and a half on Wednesday, fuelling concern Asia's third-largest economy will drive off foreign investors with its minimum alternate tax (MAT).

On Thursday, the government set up a panel to suggest ways to resolve the MAT dispute as well as some other tax issues.

Finance Minister Arun Jaitley told lawmakers in parliament the government was committed to three principles: certainty of taxation, avoidance of retroactive taxation and enabling both domestic and foreign investment.

"We will ensure that these principles are adhered to in letter and spirit," Jaitley said.

India first introduced MAT during the 1990s to ensure companies paid a minimum amount of tax, normally 20 per cent of profits.

But the tax department started issuing tax demands to foreign portfolio investors only late last year, citing a 2012 legal ruling that made overseas funds liable to pay MAT.

While India has exempted capital gains made by foreign investors as of April 2015 from MAT, it says tax demands on past incomes could only be reversed by the Supreme Court.

Some foreign funds have appealed against the ruling in the Supreme Court. UK-based Aberdeen Asset Management has challenged the MAT claim in the Bombay High Court.

Jaitley said on Thursday the government was looking for an early hearing in the Supreme Court of those appeals.

(Reporting by Rajesh Kumar Singh; Editing by Larry King)