New Delhi/Mumbai: India said foreign portfolio investors can use tax treaties to reject demands on past capital gains, seeking to defuse a row that cast a cloud over the $48 billion that’s poured into stocks and bonds from abroad.

Foreign institutional investors domiciled in countries that signed double taxation avoidance treaties with India are exempt from these levies, Central Board of Direct Taxes chairwoman Anita Kapur said in a telephone interview in New Delhi.

Kapur spoke after India’s finance ministry held a conference call with investors to ease concerns over the minimum alternate tax (MAT), which led some tax officials to claim past dues of as much as $6.4 billion. The spat jarred with Prime Minister Narendra Modi’s pledge to end what his one-year-old government has called the “tax terrorism" of the prior administration.

The clarification signals foreign portfolio investors coming from treaty countries such as Singapore or Mauritius won’t have to pay a 20% levy on past capital gains under the minimum alternative tax, according to Sameer Gupta, tax leader for financial services at Ernst & Young.

The S&P BSE Sensex equity index rebounded to close up 0.8% in Mumbai, after an intra-day fall of 1.1%.

“The markets rebounded after the clarification that back-tax claims will be closed for treaty benefit holders," said Anita Gandhi, a director at Mumbai-based Arihant Capital Markets Ltd. Gandhi attended the ministry’s call with investors.

Finance minister Arun Jaitley in his budget speech in February said overseas funds don’t need to pay the levy from 1 April, but in doing so energized some officials to pursue claims for prior financial years.

Officials hadn’t levied MAT on institutional investors abroad in the past 22 years, according to funds’ body ICI Global.

Foreigners invested about $20 billion in Indian stocks in the past year, and $28 billion in bonds. The inflows into equities helped the Sensex index surge 23% in the period, one of the top climbs in the world. Bloomberg

Close