The government said on Friday it would change a law to allow it to tax foreign firms for acquisitions of assets in the country after it lost a $2.2-billion fight with British mobile phone giant Vodafone.
Tax lawyers said the planned move would revive uncertainty about India's investment regulatory climate.
In January, the Supreme Court dismissed a 112.2-billion-rupee ($2.24-billion) tax bill imposed on Vodafone over the firm's $10.7-billion takeover of Hong Kong-based Hutchison Whampoa's Indian cellular subsidiary in 2007.
The planned change to the 1961 Income Tax Act would be retroactive to April 1, 1962, according to documents presented by finance minister Pranab Mukherjee in Parliament when unveiling the 2012-13 national budget.
Under the change, resident and non-resident companies alike would be required to deduct tax and pay it to the Indian government if a merger transaction involved an Indian asset even if the deal was carried out on foreign soil.
"The new amendment is only a clarification reiterating the point that such transactions are to be taxed in India," finance secretary RS Gujral, told India's NDTV channel.
The proposed changes state any firm incorporated outside India shall be deemed to be located in the country if its value comes mainly from assets in India.
Tax officials had contended Vodafone should have withheld the amount the seller, Hutchison, would owe in capital gains tax when it bought the Indian mobile unit.
However, Vodafone, the world's largest mobile operator by subscribers, argued that it was exempt from paying any tax because the deal took place in the Cayman Islands and both buyer and seller were foreign.
Vodafone also noted it was the purchaser and made no gain on the deal.
The government had said earlier in the week many cases similar to the Vodafone transaction were pending before Indian tribunals.
Tax lawyers said the proposed amendment could allow the government to reopen its tax case against Vodafone. Vodafone said it could not immediately comment on the government's announcement.