Vodafone is the largest overseas corporate investor in India and its five-year $2.2 billion tax battle has come to symbolise the perils foreign firms face from doing business in the country.
The group, the world's largest mobile operator by revenue, thought it had finally secured victory in January when India's Supreme Court dismissed a tax demand from the authorities linked to Vodafone's 2007 acquisition of Indian mobile assets.
But an unexpected proposal in March to amend 50-year-old tax laws would allow the government to open a new front against the company, sparking condemnation from international trade groups and companies.
The Indian government's retrospective tax proposals have raised significant and widespread concern within India and internationally and have been criticised by businesses and industry, Vodafone said.
The British group said it had served a notice of dispute against the Indian government to protest the tax proposals which could reverse the legal victory it won in January. It said the notice was the first step required before the commencement of international arbitration.
International arbitration proceedings take years to resolve, analyst Nick Brown at brokerage Espirito Santo said. I doubt there'll be any resolution in the near term.
We've actually recently decided it was prudent to re-introduce the potential tax liability into our sum-of-the-parts valuation. It's starting to look as though India won't be denied a second time around.
The earlier court victory had been hailed by business groups as a sign of an improving climate for foreign investment and the many twists and turns have been closely watched by the business community.
Vodafone has endured a rocky time in India.
While its Indian unit became the country's second-largest mobile carrier by revenue and third-largest by subscribers, it was forced to take an impairment charge of $3.6 billion in 2010 due to cut-throat competition and escalating spectrum costs.
Vodafone shares, which had fallen when the Indian government proposed the retrospective tax legislation, rose 1.3 percent to 172 pence by 1225 GMT, slightly outperforming London's blue-chip FTSE index <.FTSE>.
The tax case stemmed from Vodafone's 2007 acquisition of Hutchison Whampoa's <0013.HK> Indian mobile assets for $10.7 billion.
The Indian authorities had argued that the transaction was liable to be taxed in India and the government maintains it warned Vodafone it would be liable for tax before the deal was done.
Vodafone argued that the Indian authorities had no right to tax the transaction between two foreign entities and even if tax was due, it should be paid for by the seller not the buyer.
Vodafone said in a statement on Tuesday that the 2012 finance bill proposals violated international legal protections granted to Vodafone and other foreign investors in India.
India's parliament is likely to approve in early May the finance bill, which includes the tax change proposals. An official in the Prime Minister's office said he could not comment.
In arbitration, the two sides would each select an arbitrator who would then select a chairman. The arbitration would take place in a neutral country and the process would be governed by international business principles.
Vodafone said the notice had been served by the group's Dutch subsidiary and was the first step prior to the launch of international arbitration under a bilateral treaty between India and the Netherlands.
(Additional reporting by Frank Jack Daniel in New Delhi; Writing by Kate Holton; Editing by David Holmes)