British companies that have set up shop in India to take advantage of the economy’s rapid growth face big new taxes under proposals tabled by the country’s Government.

India’s income tax laws were framed nearly 50 years ago and have since been subject to about 5,000 amendments. The result, experts say, is one of the most labyrinthine revenue codes in the world, in a country where a tax dispute takes at least a decade to negotiate the courts.

To simplify matters — and in the hope of expanding India’s tiny tax base — the Government has proposed a sweeping redraft. Experts agree that the move is overdue, but say that the proposals threaten to throw into disarray the tax planning of scores of London-listed companies, including Vodafone, HSBC and Tesco, which have operations on the sub-continent.

According to Pranav Sayta, a partner of Ernst & Young, the accountancy firm, of particular concern is a proposal that would mean a foreign company with any management presence in India would be considered a tax resident of the country — and so have its global revenue deemed taxable there at a rate of 25 per cent.

Transactions carried out by a British company with a presence in India would be subject to Indian taxes, no matter where the deals were carried out. Experts fear that the planned moves would scare overseas companies away from the country. “The Indian Government’s proposals are immensely ambiguous,” Mr Sayta said. “They could have a serious dampening effect on foreign investment.”

The tax changes must go before the Indian Parliament before they are implemented and Western companies are expected to lobby to amend them.

As they stand, the proposals would also grant the Indian tax authorities sweeping new discretionary powers, which would allow them to decide whether a corporate structure had been created for legitimate business purposes or to avoid tax. The burden of proof would be on the company.

In a survey of 500 multinational companies by Taxand, an independent network of tax advisers to multinational businesses, 77 per cent of respondents feared that the move would lead to a flood of investigations. Mukesh Butani, of Taxand, said: “The companies we interviewed fear witch hunts.”

Other experts are concerned that the granting of such discretionary powers would foster corruption.

The Government in Delhi has also proposed that the new code would supersede existing bilateral tax treaties, including that with Britain. “India is gearing up to renege on these tax deals,” one expert said.

The Indian tax authorities have become markedly more aggressive in recent years, experts say, and have targeted deals that nominally have taken place well beyond the country’s shores. One of the highest-profile cases involves Vodafone, the British-based mobile group, which is embroiled in a $2 billion (£1.2 billion) battle with the Indian taxman.

The case centres on whether Vodafone should have paid tax on its $11 billion acquisition of Hutchison Essar two years ago. India’s tax department has argued that, even though Vodafone was the buyer and Hong Kong’s Hutchison was the seller, the British group should have withheld about $2 billion of capital gains tax on the deal — which was conducted through a complex network of offshore entities — on the Indian Government’s behalf.

Experts suggest that the tax proposals could mean more foreign companies get caught in similar disputes. “As India has become more globally integrated, tax officials have taken radical new steps regarding global transactions — even those with only an indirect effect on India,” Mr Sayta said.

The proposals follow the introduction of anti-tax avoidance legislation in Britain and the United States, as countries fight to capture a shrinking pool of global corporate tax revenues.