Vodafone acts fast on India tax demands

Vodafone is ready to take the Indian government to the United Nations over its attempts to force the FTSE-100 telecoms giant to hand over more than $2bn in backdated tax.

The government has already failed twice in the Indian Supreme Court over its demand for capital gains tax in relation to Vodafone's $10.7bn takeover of Hutchison Whampoa's Indian mobile phone unit in 2007.

Vodafone now has more than 10.5 million subscribers in that unit, but what should have been considered a huge success has been marred by the Indian government's desire to claim capital gains tax on the deal. Having lost in the Supreme Court, as both buyer and seller were based overseas, the government has now introduced legislation that would apply CGT to, retrospectively, tax capital gains on deals dating back to 1962.

This would mean the likes of Kraft Foods would have to pay tax on its £10bn takeover of Cadbury two years ago, as the British confectioner possessed significant Indian operations.

A City source said: "Forgetting that if CGT is paid it is always by the seller, this legislation could seriously hurt India's ability to attract investment. This could affect hundreds of overseas companies."

However, it is widely acknowledged that Vodafone is the company that the government has in its sights. The group has already said it feels the move is "grossly unjust" and that it is in talks with its advisers, both in India and internationally.

However, The Independent on Sunday understands that one option under serious consideration is for Vodafone to take the Indian government to the United Nations Commission on International Trade Law, where the dispute could be settled through arbitration. UNCITRAL, which works in co-operation with the World Trade Organisation, could potentially make a binding judgment on the row.

There are also routes through the Indian courts, where Vodafone might try and get the legislation, which was added to the government's Finance Bill, declared unconstitutional.

Soli Dastur, a prominent Indian lawyer, has argued that while the government has the power to introduce the legislation, it would not be able to overturn decisions made in the highest court in the land.

Vodafone's shares fell 1.29 per cent on Friday.