The government on Monday announced it had stayed the issue of fresh notices to foreign institutional investors regarding the alleged non-payment of minimum alternate tax (MAT) on capital gains made by them upto March 31, 2015, with instructions having been issued to tax officials to refrain from taking any “coercive action” pending a report on the issue.

The announcement marks an attempt to defuse the raging controversy over MAT payouts, which has dented the outlook of foreign institutional investors toward the country’s stock and bond markets.

The instruction comes a week after Union Finance Minister Arun Jaitley set up a committee headed by Justice (retired) A P Shah to look into the issue of disputes regarding levy of minimum alternate tax (MAT) on FIIs for past years.

Following the notices sent in April, FIIs have pulled out a net Rs 15,000 crore over the last 16 trading sessions (barring net inflows of Rs 16,357 crore on April 21 for investing into Sun Pharmaceutical) while the Sensex fell by over 2,000 points during this period.

“In the light of the Finance Minister’s announcement, officers dealing with international taxes have been advised that no coercive action be taken for recovery of demand already raised by invoking provisions of MAT in the case of foreign companies particularly FIIs. Issue of fresh notices for reopening of cases as also completion of assessment should also be put on hold unless the case is getting barred by limitation,” the notification issued by Central Board of Direct Taxes (CBDT) said.

With the 68 notices sent to FIIs for their past capital gains upto March 31 creating an uproar, the government has been trying to soothe foreign institutional investors, who turned net sellers for the first time since April 2014.

On the decision, Andrew Holland, CEO, Ambit Investment Advisors, said, “I think it (the MAT controversy) came at the wrong time and there were bigger issues and reforms to do… Foreign investors have invested heavily in India and additional tax raises a concern. While the panel will come out with their report and there will always be concerns but I think everyone can move ahead from this for now.”

Earlier, the government had handed out an assurance to investors that FIIs will be able to avail of the benefits of double taxation avoidance agreement (DTAA) to escape the tax net.

Tax experts said that the instruction will give enough time to the FIIs till the Supreme Court gives its decision on the Castleton tax case that is on in the apex court, which is expected to come up for hearing in August.

Sameer Gupta, Tax leader for financial services EY India said, “There are a few blocks moving finally. The Castleton case is now setup for early hearing by the Supreme Court in August. The instruction issued basically puts on hold any fresh reassessment notices

being issued and proceedings, unless they are getting time barred and potential collection of demands – so in that sense a welcome step. This will give enough time until the Supreme Court case plays out, and so until the end of this fiscal, we should expect no further adverse steps.” In the Budget 2015-16, the Finance Minister clarified that MAT would not be applicable on foreign companies earning from capital gains on securities, royalty, fee on technical services and interest, and FIIs, providing a huge breather to foreign investors. However, there is no reprieve for the retrospective cases, which the NDA government has been calling the “legacy issues”.