Mumbai/New Delhi: International trade groups representing more than 250,000 companies have warned the Prime Minister Manmohan Singh that new taxation proposals by his government have led foreign businesses to reconsider their investments.    

India's Union Budget last month outlined a proposal to 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.   

On Monday, George Osborne, Britain's Finance Minister, raised his concerns over the issue with his Indian counterpart.   

The warning, contained in a letter from seven foreign business groups, is the broadest criticism yet by the overseas business community of an Indian government that has failed to enact economic reforms to spur investment and revive growth.   

"The sudden and unprecedented move...has undermined confidence in the policies of the Government of India towards foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India," the groups said in a March 29 letter to Singh.   

"This is now prompting a widespread reconsideration of the costs and benefits of investing in India," continued the letter, signed by bodies including the U.S.-based Business Roundtable, the Confederation of British Industry, the Japan Foreign Trade Council and Canadian Manufacturers & Exporters.   

The Business Roundtable is chaired by Boeing Co Chief Executive James McNerney and represents companies with more than USD 6 trillion in revenue.   

"We are concerned about the proposed budget measure," Osborne told reporters after his closed meeting with Mukherjee.    

"Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India."   

India's reputation among global investors has taken a beating over the past year as the government has lurched from crisis to crisis, including a botched attempt to allow foreign supermarkets into the country and a long-running stand-off with South Korea's POSCO over a USD 12 billion steel plant.   

Sluggish investment is partly to blame for slowing growth in Asia's third-largest economy, which grew an annual 6.1 percent in the December quarter, the weakest in nearly three years.       

Increasing uncertainties

A long-running tax struggle between London-listed Vodafone Group Plc, India's largest overseas investor, and the Indian government has come to symbolise the perils to foreign investors in the country.   

Vodafone won a five-year legal battle in January when India's Supreme Court dismissed a USD 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 a victory for clarity in the country's investment climate, which has suffered due to policy paralysis, regulatory uncertainty and widespread corruption allegations against the government.   

But the 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.  

"What India needs, like all countries, is a stable and predictable tax system to encourage investments, and we have concerns that this budget proposal would not add to that," Osborne said, adding he had raised his concern with Mukherjee.   

Parliament is expected to consider the proposals during the last week of April.   

"Some of our member companies had already begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years," the letter said.   

Foreign direct investment (FDI) in India stood at USD 35.3 billion in the first nine months of the 2011-12 fiscal year, powered by two multi-billion-dollar energy deals, more than the USD 32.9 billion registered in the 12 months to March 2011, according to data from the Reserve Bank of India.   

India needs increasing FDI and foreign institional inflows to offset a rising trade deficit, which is likely to have hit USD 175 to USD 180 billion in the year that ended in March.        

'Grossly Unjust'

Vodafone said last week it was considering a number of actions after the proposal, which it said was "grossly unjust".      

Policy confusion in India's telecom sector over the tainted allocation of mobile licences in 2008 recently saw Abu Dhabi's Etisalat announce the winding down of its Indian operations.   

Norway's Telenor has also been embroiled in a dispute with its Indian partner, Unitech Ltd, and has said it would seek to migrate the business to a fresh venture with a new partner.      

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, the business groups said a plan to expand the definition of "royalty" retrospectively to 1976 would affect companies such as Ericsson.    

"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world," the letter said.