New Delhi: The government on Wednesday constituted a three-member committee under retired judge A.P. Shah to see whether minimum alternate tax (MAT) can be applied on foreign portfolio investors (FPIs). The terms of reference of the committee, however, does not include any other so-called legacy issues.

Finance minister Arun Jaitley on 7 May had announced the constitution of a committee headed by Shah, chairman of the Law Commission, to look into the issue of MAT and other legacy issues inherited from the previous Congress-led United Progressive Alliance government.

To placate overseas investors, the government has put on hold all new tax demands and recovery notices related to MAT till the committee submits its report.

The other members of the committee will be Ashok Lahiri, former chief economic advisor in the finance ministry, and Girish Ahuja, former associate professor of commerce at the Shri Ram College of Commerce, University of Delhi, the finance ministry said. Incidentally, Lahiri heads another high-level committee that was constituted last year to interact with trade and industry on tax laws.

The committee will examine the levy of MAT on FIIs for the period prior to 1 April and its term will be one year or as notified by the government. “The committee will examine all the related legal provisions, judicial/quasi judicial pronouncements and such other relevant aspects as it may consider appropriate," a finance ministry note said.

MAT is a tax levied on profit-making entities that don’t pay corporate income tax because of exemptions and incentives.The committee has been asked to give its recommendations expeditiously though no time frame for it to submit the report has been notified.

“As initially the committee would focus on the issue of MAT on FIIs for giving its report expeditiously, other issues to be referred to the committee will be notified in due course," the statement said.

The levy of MAT on FIIs had threatened to undo all the positive steps taken by the National Democratic Alliance government to encourage foreign investors to invest in India.

The tax row had started after the income tax department started issuing notices to foreign investors for levy of MAT on capital gains accruing to them from sale of shares, citing an August 2012 order by the Authority for Advance Rulings in the case of Castleton Investment Ltd that MAT is applicable on both domestic and foreign companies.

Foreign investors opposed these notices, arguing that MAT can be levied on book profits of companies and that they do not maintain book of profits in India.

Looking to end the dispute, Jaitley said in his budget speech that MAT will not be applicable on capital gains accruing to FPIs from sale of shares starting in 2015-16. He went on to provide further relief on the MAT front by exempting interest income, royalty, technical fees and capital gains accruing to foreign companies from the MAT net by moving amendments to the Finance Bill 2015.

But the finance minister refrained from giving any blanket protection for the previous years, saying the matter should be decided by judicial authorities.

The matter is expected to reach its finality only when the Supreme Court decides on the applicability of MAT in an appeal filed by Castleton that is likely to come up for hearing in August.