Finance minister Nirmala Sitharaman says FPIs that register as companies to be out of surcharge ambit

"Some FPIs are registered as trusts. Therefore as an individual entity, he comes under taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as a company", she said in reply to Finance Bill, 2019.

Markets fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions.

The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.

While the rationale behind such an increase in surcharge is to levy a higher surcharge only on HNIs to garner more revenues in tax falling scenario, it has sent jitters among FPIs, and partially triggered the subsequent crash in the stock market.

Taking this into account, the Central Board of Direct Taxes (CBDT) chairman P.K. Modi had offered a solution to such FPIs that restructure themselves as corporate entities.

To discuss the implications of this, CNBC-TV18 spoke to Dinesh Kanabar, chief executive officer of the Mumbai-based Dhruva Advisors.

Kanabar said, "This comes more as a surprise than a shock. The government from day one don't want to roll back this provision and it was evident from CBDT chairman's statement. There was also an earlier statement about a couple of days back where the chairman of CBDT went on to say that those trusts may consider converting themselves into a company."