New Delhi, Aug 3 (IANS): 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.

Though 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 the 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 current Parliament session ending in few days, the government will have limited option to correct FPI surcharge and only option left would be to make changes through an ordinance.

As of August 2, FPIs have been net seller of over Rs 20,500 crore worth of stocks on the BSE, NSE and MSEI in the capital market segment, since July 1.

Consequently, the S&P BSE Sensex has shed around 2,700 points since the announcement on July 5. The real carnage at the indices began on July 5 when the reality about FPI surcharge became clear.