New Delhi – India’s finance ministry moved Thursday to resolve a simmering tax row that had seen foreign investment funds faced with having to pay billions of dollars in levies on past profits.

Indian workers check decorative lighting material as they work on a watch tower of The Finance Ministry in New Delhi on August 14, 2015, on the eve of the country's Independence Day celebrations © AFP/File Money Sharma
Indian workers check decorative lighting material as they work on a watch tower of The Finance Ministry in New Delhi on August 14, 2015, on the eve of the country’s Independence Day celebrations © AFP/File Money Sharma

The Minimum Alternative Tax (MAT) was introduced in 1998 targeting institutional investors that do not pay corporate income tax, but was not traditionally considered applicable to foreign firms with no base in India.

However last year overseas fund managers took fright after several firms including Aberdeen Asset Management were hit with back-dated demands for MAT — leading some to threaten to pull out of India.

The government said Thursday it would amend tax laws so that companies which do not have a permanent presence in India and which have a double taxation avoidance agreement with it will not be made to pay.

The move had been widely expected after Finance Minister Arun Jaitley in early September reassured foreign investors that the backdated tax would not apply.

The law will be amended with effect from April 1, 2001.

India’s business-friendly government has said it will not engage in “tax terrorism” as it tries to persuade foreign companies to plough much-needed investment into the country.

However an unpredictable tax regime is widely cited by foreign companies as a deterrent to investing in India, which stands at 142 in the World Bank’s Ease of Doing Business rankings, out of 189 countries.