Were the estimates of tax demands from foreign funds, raised by the Central Board of Direct Taxes (CBDT) towards capital gains made by them in the past, grossly exaggerated? It seems so from an answer given by Minister of State for Finance Jayant Sinha on Friday.

"Tax notices have been issued in 68 cases of overseas funds to bring to tax the book profits as per minimum alternate tax (MAT) provisions under Section 115JB of the Income Tax Act, 1961," the minister replied in writing to a question in the Lok Sabha.

"So far, total tax demand of Rs.608 crore has been raised," he said in reply to a question, that sought information on whether such notices were issued for tax evasion, adding that this was a legal issue and provisions were being applied accordingly.

Over the past week, however, estimate of the quantum of tax demand has been some Rs.40,000 crore (around $3-$4 billion) from some 50-150 foreign funds -- a matter that has been raised with the top brass of the finance ministry by all stakeholders and foreign investors.

The statement from the minister came even as the direct tax board on Friday wrote to all income tax principal chief commissioners, that cases where foreign funds have claimed tax benefits, using the treaties with other countries, must be dealt with fast.

"Since the issue involved is limited, such claims should be decided expeditiously. Accordingly, it has been decided that all cases of foreign institutional investors seeking treaty benefits under the provisions of tax treaties may be taken on such claims within a month."

Reacting to the development, Sunil Shah, a partner with consultants Deloitte Haskins and Sells, said the recent debate on tax demands on some foreign funds under minimum alternate tax, as also the reopening of cases pertaining to the past, needed government clarification.

"Otherwise it will need to be resolved by the courts," he said, adding there were several foreign portfolio investors who qualified for benefits under the double taxation avoidance treaties that India had entered into with other countries.

"This is a welcome step that will clear the uncertainty for some categories of foreign funds. For those who do not have treaty protection, the controversy would continue till it is settled either by the government or by the courts," Shah said referring to the tax board circular.

Minister of State for Finance Sinha has already assured foreign funds, during a meeting with them on Thursday, that the government was already considering some amendments to clarify its position on minimum alternate tax rules with retrospective effect for their benefit.