By Henry Foy
MUMBAI (Reuters) - International trade groups representing more than 250,000 companies have warned Indian Prime Minister Manmohan Singh that new taxation proposals by his government have led foreign businesses to reconsider their investments.
India's federal 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 criticized for further denting investor sentiment towards India.
The warning, contained in a letter from seven overseas 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, and was sent days before George Osborne, Britain's finance minister, was to hold talks on Monday with his Indian counterpart.
"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 addressed to Singh and 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 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 $6 trillion in revenue.
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 $12 billion steel plant.
Sluggish investment is partly to blame for slowing growth in Asia's third-largest economy, which grew 6.1 percent in the December quarter, but the weakest in nearly three years.
Osborne was to meet Indian Finance Minister Pranab Mukherjee on Monday, and the issue of retrospective taxation on mergers outside of India was expected to be discussed.
A long-running tax struggle between London-listed Vodafone Group Plc, India's largest overseas investor, and the Indian government has come to symbolize the perils to foreign investors in the country.
Vodafone won a five-year legal battle in January when India's 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 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.
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.
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 licenses in 2008 has recently seen 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, also sent to the Indian finance minister, the business groups 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.
(Additional reporting by Matthias Williams in NEW DELHI; Editing by Tony Munroe and Raju Gopalakrishnan)