Vodafone is facing a $2 billion (£989 million) tax demand for alleged unpaid tax after its $11.1 billion takeover of Hutchison Essar.

The mobile group, which seized control of India’s fourth-biggest mobile operator this year, has received a letter from India’s Income Tax Department concerning a bill for capital gains tax that it allegedly owes.

Last night Vodafone confirmed receipt of the letter but said that it felt its case was strong. A spokesman said: “We have had clear legal and tax advice that no tax is payable either by Vodafone Essar or any other member of the Vodafone group and will defend our position vigorously.”

Under Indian law any property located in the country that is transferred to a new owner attracts capital gains tax at a rate of 22 per cent.

People involved in the deal pointed out that liability for capital gains tax payments would usually lie with the seller rather than the buyer.

However, it is understood the tax department’s case against Vodafone rests on alleged complications around the legal definition of exactly which body carried out the transaction.

Vodafone announced an agreement in February to acquire companies that control 67 per cent of Hutchison Essar from Hutchison Telecom International for $11.1 billion.

The deal – which marked Indian’s single biggest investment from overseas – valued the entire business at just under $19 billion.

Yet the buyout ran into problems after unhappiness from the minority shareholders in the business, the brothers Sashi and Ravi Ruia, who eventually agreed to become Vodafone’s joint venture partners.

The British mobile giant also faced legal questions about whether its holding breached India’s investment rules.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive