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MUMBAI (Reuters) - A new tax proposal by the government could hurt flows of anonymous foreign funds into shares, analysts said on Monday, dealing another blow to equity markets that have been buffeted by worries about slowing corporate earnings growth and stymied economic reforms.

Investments into Indian stock markets through participatory notes, or P-notes, is seen slowing if the government introduces the so-called General Anti-Avoidance Rule (GAAR) next month, they said.

Finance Minister Pranab Mukherjee in his budget presented on March 16 for the year starting on April 1 proposed to introduce the GAAR in order to "counter aggressive tax avoidance schemes." He said it would be ensured it was used in appropriate cases.

P-notes are issued by foreign portfolio investors registered with the SEBI, or by their sub-accounts, to investors overseas and they offer the buyer anonymity.

"P-notes generally avoid paying taxes in India and because of this GAAR the taxation of P-notes can definitely get impacted," said Sunil Jain, a tax expert with law firm J. Sagar Associates.

"If there is an adverse impact on the taxability of P-notes because of the wide power assumed by the government through GAAR, then obviously it can impact investments through P-notes and therefore general sentiment in the market," he said.

The BSE Sensex ended 1.8 percent lower on Monday hit by the uncertainty about the tax proposal, dealers said. The index fell nearly 2 percent during the day.

The benchmark index has fallen nearly 4 percent this month, after rising 15 percent in the first two months of this year on strong foreign fund inflows.

"We do not have clarity on the exact modalities, but this could have the effect of shutting down the P-note to invest in India," said Macquarie in an email to clients seen by Reuters, referring to the GAAR proposal.

The brokerage said stocks bought through participatory notes could be subject to short-term capital gains tax of 42 percent and long-term capital gains tax of 21 percent as a result of the new taxation proposals.

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GAAR tax proposal clouds foreign portfolio investment outlook