Vodafone said it served a notice to the Indian government on Tuesday as a first step in seeking international arbitration in a dispute that could see it paying over US$2 billion in taxes.
India's Supreme Court ruled in January that the British mobile operator did not have to withhold tax from Hutchison Telecommunications when buying its stake in 2007 in Hutchison Essar, a large Indian mobile operator.
But the Indian government while presenting its annual budget last month proposed retrospective tax legislation that, if enacted, would countermand the verdict of the Indian Supreme Court, Vodafone said on Tuesday.
The British mobile operator was asked by Indian tax authorities to pay the over $2 billion for not collecting tax from Hutchison when it paid $11 billion to acquire a 67 percent stake, both directly and indirectly through Indian partners, in joint venture Hutchison Essar.
India's income tax laws require that tax should be deducted before a payment is made to a foreign company or nonresident for assets in India. Vodafone said it is not liable to pay tax on the transaction, which was executed outside the country by two foreign companies.
The notice, served by Vodafone's Dutch subsidiary, is the first step required prior to the commencement of international arbitration under a bilateral investment treaty between India and the Netherlands, Vodafone said.
Government officials were not immediately available for comment.
India already faces the threat of international arbitration from two other telecom companies - Sistema and Telenor - whose Indian joint ventures lost their 2G mobile licenses after India's Supreme Court ordered in February that 122 licenses awarded in 2008 across 22 service areas should be canceled, as they were allotted irregularly. The government's review petition is being heard by the court.
Telenor, a Norwegian mobile operator, which could stand to lose all its 22 mobile licenses in India, said it is considering action against India under a treaty between Indian and Singapore, as the investments in India were made by Telenor's subsidiary in Singapore. Russian company Sistema sent a notice in February to the Indian government invoking a bilateral investment treaty between India and the Russian government. It could lose 21 licenses.
The uncertainty about investments and the business environment in India is however likely to put off investors in key sectors like telecommunications, according to analysts. Some of the foreign companies that invested in Indian companies that bagged the 2G licenses in 2008 have claimed that they invested without any knowledge of any irregularity, and because the licenses had been awarded by the government to these companies.