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A court in India has given the country’s taxman the green light to pursue Vodafone, the world’s largest mobile operator by revenue, for an estimated $2 billion (£1.4 billion) in capital gains tax.

The ruling makes it likely that hundreds of other overseas companies that have invested in the sub-continent – many of them British – will have large tax bills hanging over them for years to come. It may dissuade foreigners from making future Indian acquisitions.

The British-based mobile group is being chased by the Indian Income Tax Department after its acquisition last year of a majority stake in Hutchison Essar for $11 billion. The Indian authorities say that Vodafone should have withheld $2 billion in tax on the sum that it paid to acquire the India-based company.

Vodafone, which is fixed on expanding in emerging markets such as India to offset moribund growth in the West, says that it is not liable to pay tax in India, as the deal took place between a complex network of offshore tax havens.

The London-listed group has also argued that retrospective changes in the tax laws proposed in this year’s Indian Budget, which make it liable for the tax, were unconstitutional. The British company had filed a petition to the High Court in Mumbai asking to be exempt from the tax. The court refused the request yesterday.

The dismissal allows the tax authorities to investigate Vodafone’s Indian acquisition, but the High Court has given Vodafone eight weeks to file a fresh appeal to the Indian Supreme Court. The company has said that it will do so.

“Litigation doesn’t generally proceed swiftly in this country and the stakes here are high. This could take years,” a source close to Vodafone said. An official spokesman for the company said that it was “confident of a positive outcome ultimately”.

The takeover involved Vodafone International Holdings, a Dutch-registered division of Vodafone Group, which made the payment for the stake in Hutchison Essar to CPG, a Cayman Islands-based subsidiary of Hutchison Telecommunications International, the Hong Kong-based parent company. Under international norms, tax would usually be levied in the seller’s country, although complicated special factors often apply.

The case is expected to affect as many as 400 other companies, tax experts say.

In January, Vodafone announced plans to invest $2 billion this year in India, the world’s fastest-growing mobile market. Its operations in the country, where ten million new mobile customers are being added every month, have quickly become a flagship asset.

Vodafone is believed to be preparing a bid for 3G licences in India, in an auction that may raise $9 million, according to analysts. The auction will also give potential new entrants, such as AT&T, the American telecommunications group, the opportunity to set up shop in the sub-continent.

The funds already allocated to India by Vodafone will be spent on infrastructure, retail outlets and advertising in a country where mobile subscribers are expected to more than double in the next three years to 500 million. In March, India overtook the United States to become the world’s second-biggest mobile market after China.

Vodafone said in a statement: “We are disappointed that the court was unable to agree with [us] that the taxability or not of the transaction could be decided now.”

Vodafone Essar had 56.7 million subscribers in India at the end of October, making it the third-biggest operator, behind Bharti Airtel and Reliance Communications.

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