The Indian government says it wants to crack down on tax avoidance involving a treaty with Mauritius, which is a favoured route for foreign investment in Asia's third-largest economy.
India has been seeking to revise the pact with the Indian Ocean island to plug what it says is tax abuses by foreign companies, but has accused Mauritius of being "unwilling" to help.
There is an "unwillingness on the part of Mauritius to cooperate in addressing the problem" of misuse of the Double Taxation Avoidance Convention, India's junior finance minister S.S. Palanimanickam told parliament on Friday.
He did not detail the alleged abuse.
A joint committee was set up by the two nations six years ago to draft rules to prevent misuse of the agreement. Seven rounds of discussions have taken place so far, and another set of talks is slated but no date has been set.
The minister said the government plans to "incorporate appropriate amendments" to the treaty "for prevention of treaty abuse" and to strengthen the exchange of information on tax matters.
But critics have expressed concern that revising the pact could discourage vitally needed overseas investments in India because over 39 percent of the country's direct foreign investment comes via Mauritius.
They point out that a recent Indian Supreme Court ruling upheld the provisions of the treaty.
"Foreign investors are putting billions of dollars in the country based on the tax treaty with Mauritius," Punit Shah, a tax partner at global consultancy KPMG, told the Economic Times newspaper.
"This will be one more retrograde step."
India's efforts to revise the treaty coincides with a plan to tax foreign firms -- in some cases retroactively -- which route their Indian investments through tax havens such as Mauritius.
Companies have long griped about India's byzantine rules and suffocating bureaucracy.
But the latest, and for many investors the most worrying measure, was announced in March's budget to allow the government to tax foreign takeovers back to 1962. That plan is to be debated next week in the Indian parliament.
However, India's Congress party-led government has also been much criticised by opposition politicians for failing to tackle such issues as illegally earned money, corruption and a lack of financial transparency.
The cash-strapped government is under mounting pressure to rein in a ballooning fiscal deficit after global ratings agency Standard & Poor's cut its outlook on India's long-term debt to negative.