Hundreds of expatriate Americans use the American Community Support Association club, which has a bar, swimming pool, restaurant and a beauty parlour within the embassy premises. The club has been in existence for decades. (Agencies)
The embassy must cease all commercial activities benefiting non-diplomatic staff on its premises by January 16, a government source with direct knowledge of the dispute told.
India is furious at the December 12 arrest, handcuffing and strip search of its deputy consul in New York, Devyani Khobragade, accused of underpaying her nanny and lying on a visa application.
Still festering nearly a month on, the row has started to affect the wider relationship between the world's two largest democracies, with one high-level visit already postponed and a visit scheduled for next week by US Energy Secretary Ernest Moniz now looking doubtful.
India has already taken a number of retaliatory measures and is now stepping up the pressure on Washington ahead of a court appearance by the diplomat due on January 13.
The latest move is aimed at closing the embassy's social club to non-diplomats. India says the facilities are tax free because they are located in the embassy grounds.
"Basically the thing is that the provision of such facilities to non-diplomats and not paying taxes is clearly not in accordance with the Vienna convention," the government source with knowledge of the dispute told.
"You can't have these facilities inside and not pay taxes and allow non-diplomats," the source said. A US embassy spokesman was not immediately available for comment.
India had already curtailed privileges offered to U.S. diplomats to bring them in line with the treatment of Indian envoys to the United States. Since December, the US ambassador in Delhi can be subjected to airport frisking and most consular staff have reduced levels of immunity.
Concrete barriers were removed from a road near the embassy last month, apparently in retaliation for the loss of a parking spot for the Indian ambassador in Washington.
Known as the American Embassy club, the social centre is located on embassy grounds and along with the American Embassy School is the heart of Delhi life for the families of many expatriate employees of US corporations in India.
India is also preparing to take steps against the embassy school, which it suspects may be employing some staff in violation of visa requirements, the government source said.
Hundreds of expatriate Americans use the American Community Support Association club, which has a bar, swimming pool, restaurant and a beauty parlour within the embassy premises. The club has been in existence for decades.