The Computer Crime Act is impeding free speech and proving a hindrance to business innovation and entrepreneurship, academics and computer experts say.
The application of the act, enacted in 2007 by the Surayud Chulanont government following the 2006 coup, has also scared investors away from Thailand, Ann Lavin, director of public policy and government relations at Google Southeast Asia, said.
"The [act] should deal with direct computer crimes like phishing," she said.
"But the point is that foreign investors will not invest here because the law holds intermediaries [such as webmasters] liable" for crimes committed by others, Ms Lavin told a seminar in Bangkok this week.
"Only 1 per cent of content on the world wide web is in the Thai language. There should definitely be more, but people are afraid of the laws so they don't want to create websites," she said.
She said Section 15 of the Computer Crime Act in particular has cost Thailand a fortune in lost foreign investment.
Section 15 states that any service provider who intentionally supports or consents to breaching Section 14 will be jailed for up to five years or fined up to 100,000 baht or both.
Offences under Section 14 include importing false data that is likely to undermine national security or cause a public panic; holding data related to an offence against national security; and publishing pornographic material.
In effect, Section 15 means that website operators are held accountable if illegal content is posted on their sites, even if the content was posted by third parties, such as on a forum.
Businesses based on innovation, Ms Lavin said, need constant online communication.
"They need to connect and liaise with users of their products at all times, but [in Thailand] you have a system that needs to check everything, every time," she said.
"It's pretty obscure and could land you in jail ... putting innovators at unnecessary risk, financially and legally."
Thailand ranked 57th in the world in a recent survey to measure innovation.
A poll conducted recently by the Thai Commerce Ministry also showed that most webmasters did not understand the Computer Crime Act, while many innovators found the law cumbersome and were choosing to settle elsewhere, Ms Lavin said.
Elsewhere, she said, people could make a profit from creating popular online content. But here, she said, people were not willing to take the risk.
"We need to fix [the act], because it is unhealthy for Thailand. Google has been deterred from launching a number of Thai products because of the law too."
Google's Transparency Report shows that the company received two requests in the first half of 2012 from the of Information and Communications Technology Ministry to remove 14 YouTube videos which it deemed insulting to the monarchy.
Google decided to restrict three of the videos so that they could not be viewed in Thailand.
A 712-page report released by the Freedom of Expression Documentation Centre, a civil group monitoring internet freedom in Thailand, showed that from July 2007 to December 2012, 317 court orders were given to suspend 102,191 web addresses.
Of these, 77,491 were deemed to defame the monarchy while 23,456 were considered obscene.
Sawatree Suksri, a Thammasat University law lecturer, said an amendment to the Computer Crime Act was needed to free internet service providers from obscure legal responsibility.
"We might have to challenge court orders to block websites as being against the constitution's prescribed principles of freedom of expression," Ms Sawatree said.
She noted that the number of websites being blocked spiked in the wake of political turmoil, including the 2006 coup and the April-May 2010 crackdown.