Finance Minister Arun Jaitley Tries to Buy Peace with RBI, Foreign Investors

Mr Jaitley's plans, announced in the annual budget in February, would have stripped the RBI of authority to regulate the government bond market and manage public debt.

US and European investor groups had also been pressing the government, which is more supportive of business than its predecessor, to clarify its tax regime after inspectors tried to claw back money they say is owned on years of previously untaxed gains.

Mr Jaitley has signed an agreement with the RBI to bring down inflation, and is trying to accelerate economic growth through tax and financial reforms.

He offered to exempt foreign investors from minimum alternative tax (MAT) of about 20 per cent on income from securities transactions, royalties and technical services. Tax experts said the move would take effect from this month.

"This will bring relief to debt funds... but unfortunately the Finance Minister has not provided any relief for the past period," said Rajesh H Gandhi, partner, Deloitte Haskins & Sells LLP.

In India, foreign investors have so far 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 tax notices requiring them to pay MAT.

Mr Jaitley said investors would have to wait for a court decision on the tax notices. In an attempt to spur the construction sector, he eased MAT rules for real estate investment trusts.

Winding up the debate on 2015/16 tax proposals in the Lower House of Parliament, he told lawmakers that the government would seek to spur economic growth to near 9 per cent in coming years with measures such as easing goods and services tax.

iIndia, Asia's third largest economy, is expected to grow around 8 per cent in 2015/16 fiscal year, which would outpace China's growth rate of around 7 per cent in 2015.

More consultation

On the issue of setting up an independent public debt management agency, Mr Jaitley said the government would now consult the RBI and come up with a detailed roadmap, but declined to give any timeline.

The climbdown marks a victory for the RBI, which said the changes could interfere with its monetary policy objectives.

A group of RBI officials wrote to lawmakers and state chief ministers expressing concern over the changes before a vote in Parliament on Thursday, media have reported.