Vodafone today threatened to drag the government to international arbitration over retrospective tax legislation under the bilateral investment treaty (BIT) between India and the Netherlands.

Dutch subsidiary Vodafone International Holdings BV (VIHBV) today served a notice of dispute on the Indian government regarding proposals in the Finance Bill 2012 which it claimed violated the international legal protections granted Vodafone and other international investors in India.

In a regulatory filing to the London Stock Exchange, Vodafone has asked the Indian government to abandon or suitably amend the retrospective aspects of the proposed legislation as Vodafone would prefer to reach an amicable solution to this matter.

"However, if the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders' interest, including investment treaty arbitration proceedings under the BIT against the Indian government," the company said.

In the Budget, the government announced a proposal to amend the Income Tax Act to bring overseas deals such as Vodafone's purchase of Hutchison under tax net after the Supreme Court held that the UK firm was not liable to pay the Rs 11,000 crore in taxes.

This is sought to be done through a retrospective amendment to the Income Tax Act which gives authorities powers to reopens cases as far back as 1962 under the Finance Bill 2012.

The Vodafone statement said that the dispute arose from the retrospective tax legislation proposal which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone.

It said the proposed legislation would also countermand the verdict of the Supreme Court in January 2012, which ruled that Vodafone had no liability to account for withholding tax on its acquisition of indirect interests in Hutchison Essar Limited in 2007.

Under the BIT, Vodafone said the Indian government is obliged among other things to accord fair and equitable treatment to investors, provide full protection and security, not breach the legitimate expectations of investors in making investments, not deny justice or breach previously provided assurances and not take steps to indirectly expropriate the investment.

The statement said Vodafone believes that the retrospective tax proposal amount to a denial of justice and a breach of the Indian government's obligation under the BIT to accord fair and equitable treatment to investors.

It said the Indian government's retrospective tax proposals have also raised significant and widespread concern within India and internationally and have been criticised by businesses and industry bodies representing more than 250,000 companies across the US, Europe and Asia.