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New Delhi: In a big relief to FIIs, the government today accepted recommendation of a high level panel that minimum alternate tax (MAT) should not be imposed on overseas portfolio investors retrospectively.

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 1 April 2015, on 25 August.

"I have accepted the recommendations of the Justice AP Shah panel," he told a press conference in New Delhi. "The committee was of the view that it was not the intention of the MAT law for it to be levied upon FIIs."

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 1 April.

"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.

The MAT was introduced to facilitate the taxation of 'zero tax companies', a CNBC-TV18 report said.

"It had been observed that many companies, despite showing high profits in their books of accounts and paying substantial dividends, were paying marginal or no tax, by taking advantage of various tax concessions and other incentives, in a manner so as to avoid paying tax," the Justice Shah panel report said.

"MAT was thus envisaged as levying a minimum tax on such companies by deeming a certain percentage of their book profits, computed under the Companies Act, as taxable income."

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.

"The AAR held that Section 115JB was applicable to foreign companies, even if they have no Permanent Establishment or place of business in India. The effect and implication of this ruling was that FIIs could be liable to pay MAT," the panel said in its report.

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.