India looks to defuse tax row with foreign fund managers

India will launch a fresh drive to shed its reputation for "tax terrorism" by asking a senior judge to defuse a $6bn row with foreign fund managers and tackle tax issues alarming international investors.

Festering tax disputes have proved among the thorniest problems facing Prime Minister Narendra Modi during his first year in power, as he tries to reinvigorate the economy and improve India's reputation as an investment destination.

Most recently, Mr Modi's administration caused alarm by suggesting that foreign portfolio investors may be charged up to $6.4bn under India's minimum alternative tax (MAT), a form of taxation that traditionally applied only to domestic companies.

The MAT row hit Indian markets over recent days, contributing to an outflow of portfolio capital and sending the rupee to its lowest level since late 2013.

In an attempt to placate alarmed investors, Arun Jaitley, finance minister, announced the formation of a committee examining ways to end the dispute, to be led by former judge A P Shah, the head of the India's Law Commission,

"We have decided to refer this matter [MAT], as well as a few other tax issues, which are essentially legacy issues," he said on Thursday.

The new committee is likely to be welcomed by investors, who fear the MAT row will prompt protracted legal battles, following moves by fund managers such as Aberdeen Asset Management to take legal action over the issue.

India's finance ministry said the committee would have a broad remit to look beyond MAT, as part of wider attempts to build what Mr Modi has described as a new "non-adversarial" tax regime.

No decision had been taken on whether it will also examine India's controversial 2011 "retrospective" tax law, however, the issue lying behind a long-running $2.6bn dispute with British telcoms group Vodafone.

But one person familiar with Mr Jaitley's thinking, speaking on condition of anonymity, said that Mr Shah's body would propose "wide ranging reforms" that could "fix this [tax] problem once and for all".

"This will not just another committee to kick the can down the road," the person said. "Frankly, there is a lot of pressure on clear up this mess, and that is what this will do. This is a genuine attempt to get an outside view from someone highly regarded."

The latest taxation move comes amid hopes that India's parliament will later today pass long-awaited legislation to introduce a nationwide goods and services tax - a reform many analysts say will be the most significant since Mr Modi took power a year ago.<

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It also comes as Mr Modi's government attempts to head off rumblings of discontent among both domestic and foreign businesses that his reforms are failing to deliver tangible improvements to India's business environment.  

Mr Jaitley first hinted at concessions over MAT in an article in the Financial Times last month, in which he said that he had "not been entirely successful in convincing investors of the fairness of our tax system".

However, he blamed India's dismal tax reputation tax squarely on the previous government. "All of the disputes now attracting attention are legacy cases: tax demands arising from actions that the tax authorities and the judiciary took before we came to power," he wrote.

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