Part of the reason is that India is struggling with a massive £60bn budget deficit. It needs more funds. But India's action has seen a storm of protest from corporates and trade associations.
India's move contains the seeds of an on-going battle between Vodafone and the Indian Government. In January, Vodafone won a lengthy legal battle in January after India's Supreme Court threw out an Indian $2.2 billion tax demand relating to Vodafone's acquisition of Hutchison Whampoa Ltd's Indian mobile assets in 2007.
However India's new Budget move could see the tax retroactively applied to overseas deals if the underlying asset is India-based. No wonder many investors like Vodafone are worried. The development comes just as George Osborne is shortly due to meet the Indian Government for trade talks.
A letter to Indian Prime Minister Singh has been signed by leading trade associations from the UK, US, Japan and Hong Kong criticising the move, representing more than a quarter of a million companies. Some companies, the letter claims, have "begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years".
Investment riskDeepak Lalwani of stockbrokers Astaire & Partners says India's move "indicates lack of respect for a decision by India's highest court of law." Hardly confidence-inspiring.
Contrast this heavy-handed behaviour with India's booming middle-class consumerism. Private car sales are more than 30% up on last year. Projected growth is estimated to be 7% plus. So given India's infrastructure investment need, the move appears odd. It's also unusual for companies to openly criticise the government of a county they're heavily invested in.
So India risks seriously damaging its investment climate, by some margin. Not the best time meanwhile for Osborne to ask India to reconsider its decision to buy £7bn worth of fighter jets from the French.