International trade associations representing more than 250,000 companies have written to Prime Minister Manmohan Singh criticising new taxation proposals and warning that investment plans by overseas companies could be reconsidered.
India's budget last month outlined proposals that would allow authorities to make retroactive tax claims on overseas deals and bring in new anti-tax-avoidance measures, moves that have been criticised for further denting investor sentiment towards India.
"The sudden and unprecedented move in the Bill has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India," seven global trade bodies said in a letter to Singh seen by Reuters.
"This is now prompting a widespread reconsideration of the costs and benefits of investing in India," continued the letter, signed by bodies including the US-based Business Roundtable, the Confederation of British Industry and the Japan Foreign Trade Council.
A long-running tax struggle between London-listed Vodafone Group Plc, India's largest overseas investor, and the government, has come to symbolize the perils to foreign investors in the country.
Vodafone won a five-year legal battle in January when the Supreme Court dismissed a $2.2 billion tax demand from authorities over the British company's acquisition of Hutchison Whampoa Ltd's Indian mobile assets in 2007.
That ruling was hailed by business groups as victory for clarity in India's investment climate, which has suffered due to policy paralysis, regulatory uncertainty and widespread corruption allegations against the government.
But a proposal in the recent budget to retroactively impose tax on deals conducted overseas where the underlying asset is located in India would amend 50-year-old-tax laws and allow New Delhi to pursue tax on long-concluded transactions.
"Some of our member companies had already begun reevaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years," the letter said.
Vodafone said last week it was considering a number of actions after the proposal, which it said was "grossly unjust".
The tax proposal, if written into law, could also affect Kraft Foods Inc's 2010 acquisition of Cadbury's Indian business and deals involving Indian assets sold by AT&T Inc and SABMiller Plc's purchase of Fosters.
In the letter, also sent to Finance Minister Pranab Mukherjee, the trade bodies said a plan to expand the definition of "royalty" retrospectively to 1976 would affect companies such as Ericsson.
"There appears to be an assumption, often expressed by Indian tax authorities, that India's ability to attract foreign investment is not affected by its taxation policies and practices. This simply is not the case," the letter continued.
"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world," it said.
Sluggish investment is partly to blame for slowing growth in Asia's third-largest economy, which grew at just 6.1 per cent in the December quarter, the weakest in nearly three years.