Companies offering software services over the Internet and Internet service providers (ISPs) will either be forced to raise prices or will have to relocate offshore to avoid the economic effect of the new laws, said Intellect, the IT and electronics suppliers' organisation.
The group, which represents major UK software suppliers, said the Government was going further than the Regulation of Investigatory Powers Act intended by introducing new surveillance powers that will impose high costs on communication service providers.
Tim Conway, policy officer at the association, said it may have no choice but to advise service providers to look at moving their operations offshore if the alternative is to face higher costs in the UK.
"We are concerned that it will have an adverse effect on profitability in this industry. We expect to see international competitors talk about their cost advantages because they are not subject to the legislation. The logical consequence is that we would have to start advising our members about looking at offshore centres," he said.
Intellect said the new laws will mean that higher costs for companies using the application service provider model and for ISPs will be passed on to IT departments.
Employers with company telephone and Internet networks could also be forced to hand over the names, addresses and communication logs of staff, under the proposed regulations.
Although the Government insists the proposed extension of the number of agencies able to monitor e-mail is to help in the fight against terrorism, the changes may reduce national security if terrorists use other forms of communication, such as Internet cafes or pre-paid mobile phones, Intellect said.
The home secretary postponed the introduction of the extension to regulations earlier this week after a revolt by backbench MPs over civil liberties.