Days after the government decided to exempt foreign funds from tax on profits earned before April 1, the Central Board of Direct Taxes (CBDT) on Thursday issued a circular asking its field officers to keep in abeyance pending assessments and not to recover any outstanding demand.

To resolve a dispute that had shaken investor confidence, Finance Minister Arun Jaitley on Tuesday said the government will not to retrospectively impose Minimum Alternate Tax (MAT) on capital gains made by Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs).

The Central Board of Direct Taxes in a circular said it has been decided to carry out appropriate amendment to the Income Tax Act "so as to prescribe that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/permanent establishment in India, for the period prior to April 1, 2015."

Mr Jaitley had exempted future profits made by foreign funds from levy of MAT in the Budget for 2015-16.

"The field authorities are accordingly advised to take into consideration the above position and keep in abeyance, for the time-being, the pending assessment proceedings in cases of FIIs/FPIs... They are further advised not to pursue the recovery of outstanding demands, if any, in such cases," CBDT said.

The government, Mr Jaitley had said on Tuesday, accepted the recommendations of an expert committee formed to study MAT and will amend the Income Tax Act to clarify that foreign funds will not be subject to MAT.

The confusion over MAT erupted after the tax department sent notices to 68 FIIs demanding Rs 602.83 crore as MAT dues.

On Tuesday, Mr Jaitley said the government has accepted the recommendations of the Justice A P Shah panel that there was no basis for levy of such tax for the prior period as well.

The government, he said, decided to amend the Income Tax Act to clarify the issue with regard to levy of MAT on FIIs and in the meantime CBDT field officers will be asked not to pursue cases against FIIs.