The Afghan government has levied "illegitimate" taxes on contractors working on US-funded reconstruction projects, possibly disrupting US military operations, a watchdog said Tuesday.

Kabul's Ministry of Finance has violated agreements with Washington that are supposed to exempt contractors and sub-contractors from certain tax categories and imposed massive taxes, the Special Inspector General for Afghanistan Reconstruction (SIGAR) said in an audit.

Since 2008, the Finance Ministry levied more than $921 million in business taxes on 43 contractors funded by the US government, and at least $93 million of the taxes should have been exempt under bilateral agreements, it said.

"Based on our audit work, we believe that much of the remaining taxes are also illegitimate," the office said in a statement.

The Afghan government and contractors are locked in a dispute over the taxes and the exempt status of sub-contractors, with some firms refusing to pay, according to the report.

As a result, the Finance Ministry "has restricted contractors' freedom of movement and refused to renew business licenses, and the Afghan government has even arrested some contractor personnel," the audit said.

"The combined effect is the potential interruption of support to US military operations."

Some contractors who agreed to pay the Afghan taxes then received reimbursement from the US government for the improper fees, it said.

The inspector general accused the US State Department and other government agencies of failing to provide consistent advice to contractors about their tax liability and urged them to try to retrieve some of the money reimbursed to the contractors.

"It's disturbing that the Afghan government is targeting American contractors with unjust taxes and intimidation," Special Inspector General John Sopko said in a statement.

"It's even more disturbing that US agencies are letting it happen -- all at the expense of American taxpayers, who have already shouldered a heavy burden on Afghan reconstruction. This needs to end."

The status of contractors is a pivotal issue in negotiations between Kabul and Washington on a possible long-term US military presence in Afghanistan after the withdrawal of NATO combat forces by the end of 2014.

In a response to the audit included in the report, the State Department said it already provided consistent guidance to contractors on their tax obligations and that there was no conflicting advice among government agencies.

It also requested more information as to whether some taxes were inappropriately reimbursed to some contractors.