George Osborne, UK chancellor, attacked India’s proposed law to retrospectively tax cross-border deals, in the first such criticism from a foreign official.

He warned that the move would damage the overall investment sentiment in Asia’s third-largest economy.

Speaking from the British High Commission in New Delhi, Mr Osborne on Monday said that the Indian tax provision could hurt trade between the two countries.

“We are concerned about the proposed budget measure, not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India,” Mr Osborne told the Financial Times.

The bold comments made by Mr Osborne are likely to add further pressure on Manmohan Singh, India’s prime minister, and his coalition government, which has been tarnished by several multibillion dollar scandals and has failed to stimulate foreign investment.

India’s plans to amend laws relating to taxation of overseas acquisitions of domestic assets, which risks reopening a $2.9bn tax dispute settled earlier this year with Vodafone, has drawn harsh criticism from foreign investors already downhearted by the country’s unpredictable regulation.

The chancellor’s comments come after seven international trade groups, including the US-based Business Roundtable, the Confederation of British Industry and the Japan Foreign Trade Council, wrote a letter to India’s prime minister threatening to scrap future investments in the country.

“The sudden and unprecedented move in the Bill has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India,” said the industry group representing more than 250,000 companies.

“This is now prompting a widespread reconsideration of the costs and benefits of investing in India …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,” they added.

In January Vodafone won a supreme court case against India’s tax authorities, which had spent years pursuing the UK-listed telecoms group for capital gains tax the authorities claimed was due on its $10.9bn acquisition of Indian mobile operator, Hutchison Essar, in 2007. Legal experts say the new tax is designed to ensure that transactions between international companies with Indian subsidiaries are liable to pay domestic capital gains tax, in effect overturning the Supreme Court’s decision in January.

The UK chancellor said he had candidly conveyed his concerns to India’s finance minister, who introduced the tax measure in last month’s national budget.

“We are not threatening any retaliatory actions,” Mr Osborne said. “What India needs, like all countries, is a stable and predictable tax system to encourage investment and we have concerns that this budget proposal would not add that.”

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