Vodafone has warned India that it may scale back investment in the country if the company loses its appeal over a $2.7bn (1.7bn) tax bill.

Vittorio Colao, chief executive, indicated that Vodafone may reconsider future investments in India if the country's Supreme Court upholds an earlier decision demanding that Vodafone pay capital gains tax on its $11.1bn purchase of a controlling stake in local operator Hutchinson Essar.

"The tax issue will be incredibly important for us to determine how friendly India is," Mr Colao said in a interview with India's Economic Times. "This is a concern for our investors and for other international investors."

He warned that if India continues to demand the disputed tax payment, the country's telecoms sector would be "squashed like lemon" as international investors would reconsider their Indian development plans.

Mr Colao said Vodafone has invested more than 1bn a year into India since it joined the market three years ago and has paid almost a third of its revenues in taxes to the India exchequer. He added it was "totally unacceptable" that the Indian authorities have not pursued Hutchinson for capital gains tax on the 2007 sale.

The Supreme Court will on Monday set a date to hear Vodafone's appeal. The case has been closely followed by a string of multinational companies as it could set a precedent for other cross-border takeovers in India.

George Osborne has lobbied against the tax bill on Vodafone's behalf.