British finance minister George Osborne on Monday criticised an Indian plan to retroactively tax business deals, saying it could damage foreign investment in the fast-developing country.
A proposal to allow Indian authorities to make retroactive tax claims is widely seen as targeting British mobile phone giant Vodafone, which has been battling the New Delhi government over alleged unpaid taxes.
The company in January won a Supreme Court case against the government's bid to tax the firm over its $10.7-billion takeover in 2007 of Hong Kong-based Hutchison Whampoa's Indian unit.
But Finance Minister Pranab Mukherjee then announced a move to bypass the court ruling, adding to growing wariness among foreign investors about putting their money in Asia's third-largest economy.
"We are concerned about the proposed budget measure," Osborne said after talks in New Delhi.
"Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India."
"I was quite candid about that with my Indian counterpart," he told reporters. "What India needs, like all countries, is a stable and predictable tax system to encourage investment."
New Delhi's planned change to the Income Tax Act would be retroactive to 1962 and would oblige domestic and foreign firms to pay tax on any overseas transaction involving an Indian asset.
Osborne's visit coincided with seven global industry bodies, ranging from the United States to Japan, saying the tax threat was "prompting a widespread reconsideration of the costs and benefits of investing in India."
In a joint letter to Prime Minister Manmohan Singh, they said the "unprecedented" proposal "had undermined confidence in the government's policies on foreign investment."
Some multinationals had already begun re-assessing their investments in the country due to mounting uncertainty over taxation, the letter said.
The proposal, announced in last month's budget, "called into question the very rule of law, due process, and fair treatment in India," it added.
Signatories to the letter include the Confederation of British Industry, the United States Council for International Business and the Japan Foreign Trade Council.
"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary," the groups said.
Vodafone chief executive Vittorio Colao added his voice to the criticism, calling the move to tax cross-border deals with retrospective effect "arbitrary and punitive treatment."
In a letter to Prime Minister Singh, Colao said the government's move would "only tarnish the image of India as a destination for inward investment."
Vodafone has said it is urgently looking at ways to head off a potential fresh tax demand for $2.2 billion but has declined to reveal further details.
Indian tax officials contend Vodafone should have withheld the amount the seller, Hutchison, would have owed in capital gains tax when it sold the Indian mobile unit, which now has nearly 150 million subscribers.
Vodafone successfully argued in court that the deal was exempt from any tax because it took place abroad and both buyer and seller were foreign.
It also noted it was the purchaser and had made no gain on the acquisition.
As well as Vodafone, transactions by companies such as SAB Miller and Kraft could be affected by the plan.