Centre has called for a crucial meeting at 4pm on Friday with Foreign Portfolio Investor Representatives in North Block to discuss non stop slide in equity markets and massive erosion in market capitalisation.

It is believed that Department of Economic Affairs (DEA) Secretary Atanu Chakravarthy will be chairing the meeting. It is clear that the government’s decision to levy surcharge on portfolio investors will be the main item of discussion. The government has been grappling with the issue since budget day and while the finance bill has been passed, relentless and copious selling by FPIs has taken the sheen off Indian capital markets.

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Further government seemed to have no ideas left as former DEA Secretary SC Garg even calling it a collateral consequence of high net worth investors (HNIs) surcharge. In a major relief to Foreign Portfolio Investors (FPI) hit by budget proposal to levy higher surcharge on income tax, the government is considering a plan to grandfather all income generated by FPIs.

Through a temporary measure, the changes would help FPIs avoid paying higher tax for the period between April 1 and July 5 of current financial year when surcharge on super rich income tax was not applicable.

The government proposed raising surcharge on super rich in the budget which was presented by Finance Minister Nirmala Sitharaman on July 5. However, this surcharge also increased the tax burden on FPIs as most are organised as trusts, association where taxation is similar to individuals.

Sources said that government is looking whether provisions of sections 119 of Finance Income tax Act can be applied in the case of FPIs to provide them partial relief from super rich tax. Section 119 empowers the Central Board of Taxes (CBDT) to direct income tax authorities to allow any claim for exemption, deduction, refund and any other relief under the Income tax Act even after the expiry of the time limit to make such claim.

This section may be used to allow FPIs deductions on the total tax paid during 2019-20. The deductions would be limited a three month period when income was generated without knowledge that tax changes are coming.

Grandfathering clause will allow such changes to provide partial relief to FPIs till the time any alternate strategy is worked by the government to provide complete relief to overseas investors. With Parliament having adjourned sine die, the government will have limited option to correct FPI surcharge and only option left would be to make changes through an ordinance.