Finance Minister Nirmala Sitharaman on Friday announced the government's decision to scrap the higher tax surcharge on foreign portfolio investors (FPIs). An increase in the effective surcharge on the super rich implemented as part of the Finance Bill 2019 also applied to foreign portfolio investors (FPIs), mainly registered as trusts. The higher taxes had rattled many FPIs as the changes announced in the first budget of the PM Narendra Modi-led second National Democratic Alliance government came into force.

“The enhanced surcharge on FPI goes, in simple words,” Ms Sitharaman said, referring to the budget proposal pertaining to foreign portfolio investors. “In other words, the pre-budget position is restored,” the Finance Minister said.

The rollback of higher surcharge on foreign portfolio investors came after capital market participants and foreign institutional investors presented a charter of demands to the Finance Minister. Those demands includes a rollback of surcharge on FPIs, in a bid to shore up investors' sentiment.

The Ministry of Finance also decided to withdraw he enhanced surcharge on short- and long-term capital gains arising from transfer of equity shares.

"In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance Act, 2019 on long/short term capital gains arising from transfer of equity shares/units referred in section 111A and 112A," MS Sitharaman said.

The implementation of higher surcharge led to a net outflow of shares worth Rs 12,418.73 crore by the foreign portfolio investors in the month of July.

The equity markets also witnessed sharp declines after the government announced imposition of higher tax surcharge on FPIs. Since the Budget day, the Sensex has fallen 8 per cent and the Nifty has plunged 9.35 per cent.