The Vodafone tax case has assumed gigantic proportions with the British telco giant upping its ante against the Indian government’s move to amend the laws retrospectively from April, 1962 calling it ''Arbitrary and punitive retrospective treatment'.

In a letter to the Prime Minister Manmohan Singh Vodafone CEO Vittorio Colao said that the proposed amendment would tarnish the image of India as an investment destination.

"We read disturbing comments in the Indian media from tax officials that they intend to use these provisions to quash the recent Supreme Court judgement and retrospectively require Vodafone to pay Hutchison's tax," Colao said in the letter.

The Vodafone CEO also recalled his meeting with Prime Minister Singh in June 2010 when the latter talked about the  faith in the protection of the Indian judicial system' saying that Supreme Court verdict had been widely hailed as a reassuring sign to investors of the strength and independence of India's institutions.

Colao's also said that it is unprecedented for governments to introduce amendments to 'overturn cases decided in law by Supreme Court'. He further said that since the transaction was closed five years ago "Vodafone cannot withhold tax from a sum paid to Hutchison then."

Meanwhile British Chancellor of Exchequer George Osborne Monday raised the Vodafone issue at a meeting with Finance Minister Pranab Mukherjee, saying the Indian government's move to retrospectively tax cross-border deals could adversely affect foreign investments in Asia's third largest economy.

The two leaders discussed the Vodafone tax issue during a one-to-one meeting lasting around 30 minutes that was held on the sidelines of the fifth ministerial-level India-UK Economic and Financial Dialogue here.

Several global trade bodies including the United States Council for International Business, Capital Markets Tax Committee of Asia, Confederation of British Industry, Business Roundtable and Japan Foreign Trade Council have criticized the government’ proposed move echoing the similar sentiments. In a joint representation to Prime Minister Manmohan Singh, finance minister and other senior cabinet ministers, they said member companies have begun re-evaluating their investments in India "due to increasing levels of controversy and uncertainty regarding taxation in recent years".

"The sudden and unprecedented move in the Finance Bill has undermined confidence in the policies of the Indian government towards foreign investment and taxation and has called into question the very rule of law, due process and fair treatment in India. "…This is now prompting a widespread reconsideration of the costs and benefits of investing in India", they said.

The finance ministry last month had proposed in the Union Budget some changes in the country’s tax rules retrospectively from 1962. This means that cross-border transactions are taxable. This includes the $11.08 billion (around Rs 55,735 crore today) Vodafone-Hutchison deal.

The amendment which seemed to be an attempt to overrule the Supreme Court’s verdict on Vodafone-Hutchison deal will be applicable to the assessment year 1962-63. This will have an impact on many foreign investments which will now be open to taxation.