Indirect transfers via P-notes (participatory notes) should be kept out of the retrospective tax net, the panel of experts on GAAR recommended.

The panel led by Parthasarathi Shome recommended in its report that the government's move to tax indirect transfers should not apply to foreign institutional investment (FII) via P-notes.

The report, released on Tuesday, said, "Taxation of non-resident investors (including P-note holders) investing, directly or indirectly, in the FII may lead to double or multiple taxation. such non-resident will not be taxable in India."

P-notes let overseas investors to make investments in India without registering with the Securities & Exchange Board of India (SEBI) and thus are taken as a means of getting quick exposure to equity market in India.

Inflows of funds through P-notes had been strained more than half a year ago after the government announced the retrospective tax on such inflows saying anonymity lets illegal flows.

The percentage of FIIs under P-notes slipped from 16.4 per cent to 11.9 per cent month on-month after the announcement of retrospective taxation in the March Budget.

But the panel's recommendation of keeping P-notes out of retrospective tax net, if accepted by the Cabinet, will likely provide a boost to fund inflows via this route.

Executive Director Sanjay Kapadia, of Ernst & Young, welcomed the recommendation, saying it would dispel the vagueness on indirect taxation of FIIs.