Senior finance ministry officials sought to calm a tax row on Wednesday, promising foreign investors a favourable environment, but stopped short of scrapping unpopular plans to claim retrospective payments.
Outside investors in India have previously paid 15 per cent on short-term listed equity gains, 5 per cent on gains from bonds, and nothing on long-term gains, but from late last year many firms received notices requiring them to pay the so-called Minimum Alternative Tax (MAT) on past income.
This could potentially bring overall tax on gains to as much as 20 per cent, alarming many investors.
Finance Minister Arun Jaitley moved in February to exempt from MAT capital gains made by foreign investors as of April, but left the field open for more than $6 billion in tax demands on past gains - triggering further uncertainty that has dragged the rupee and equity markets lower.
In a conference call with foreign institutional investors on Wednesday, junior finance minister Jayant Sinha said the tax notices arose after a precedent-setting judicial ruling and could only be reversed by the Supreme Court.
But he used his credentials as a one-time fund manager to assuage concerns.
In comments reported by two fund managers, as the call was closed to the press, Sinha told investors that they could "rest assured" the government was acting to make it possible to invest with confidence, and would back a stable tax policy.
Sinha said investors who are based in jurisdictions that have tax treaties with India will not be subject to MAT taxes.
"We would try to close all those cases where the provisions and benefits of double tax avoidance agreement apply as soon as possible," the chairman of the Central Board of Direct Taxes (CBDT), Anita Kapur, later said.
One of the fund managers who has received a tax notice, said: "What this does is clear some uncertainty for us on how to move forward, because the tax officials have been extremely uncooperative so far."
The government of Prime Minister Narendra Modi, which was voted in on a pro-development agenda, has enjoyed an extended honeymoon with foreign investors who have poured $50 billion in new investments into the country since the election last May.
The government has implemented a string of business friendly policies, including efforts to resolve past tax disputes such as a case involving Vodafone.
However, the recent MAT tax demands have unsettled investors and several business groups, including London-headquartered ICI Global, the European Fund and Asset Management Association, and Asia Securities Industry & Financial Markets Association (ASIFMA) complained by letter this month.