International funds and banks could face a bill of as much as $8 billion, said tax experts, just as many foreign investors are poised to pour money into India following the election of Prime Minister Narendra Modi, who has pledged to create a more business-friendly environment.
"This development has caught everyone by surprise and is extremely worrying for foreign investors," said Patrick Pang, a managing director at the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong. "It suggests that the Indian government can come out at any time and re-clarify what was believed to be an established tax policy on foreign investments."
ASIFMA is one of several business groups, including London-headquartered ICI Global, the European Fund and Asset Management Association, and the Federation of Indian Chambers of Commerce and Industry, to have raised the alarm over attempts by the Indian tax department to levy minimum alternative tax (MAT) on foreign investors' profits, according to sources.
In many jurisdictions governments use a form of MAT to ensure that tax breaks don't pull domestic companies' effective tax rate below a minimum threshold. Foreigners without local operations are not typically covered by such provisions.
In India, foreign investors have hitherto paid 15 percent on short-term listed equity gains, 5 percent on gains from bonds, and nothing on long-term gains, but from late last year many firms received notices from tax inspectors requiring them to pay MAT, potentially bringing overall tax on these gains to as much as 20 percent.
The following month Finance Minister Arun Jaitley intervened via the 2015 budget bill to state that capital gains made by foreign investors as of April 2015 were exempt from MAT, but that did not resolve the issue.
"The government's clarification in February, though right in intent, has created unwanted confusion, and the view the tax office is taking is that, by implication, the past years' gains can be subject to MAT," said Keyur Shah, a partner in the India tax practice at EY.

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