Prime Minister Manmohan Singh had assured his British counterpart Gordon Brown in 2010 that Vodafone was unlikely to be taxed retrospectively for acquiring Hutchinson's India operations through an overseas transaction.
Men stand outside a Vodafone store in New Delhi. AFP Photo
But the government may now ultimately decide to make the UK-based mobile operator pay up.
Replying to inquiries from Brown, Singh wrote that Vodafone would enjoy "full protection of the law" and India tax laws did not provide for taxation on backdated transactions.
"I can assure you that Vodafone will have the full protection of the law and access to the legal system in India," Singh wrote in his February 5, 2010 letter to Brown.
"I also understand there is no retrospective application of taxation and a recent court judgment has affirmed this position," the letter said.
Finance minister Pranab Mukherjee has introduced a provision in Finance Bill 2012 that, when voted into law, will empower authorities to tax companies for acquiring assets in India even if the deal is concluded overseas retrospectively from April 1, 1962.
This is widely seen as a fallout of the dispute between the government and Vodafone.
In January, Vodafone won a $2.2 billion ( Rs. 11,200 crore) tax battle after the Supreme Court ruled that it was not liable to pay any taxes under the prevailing laws.
The finance ministry then proposed changes in India's 50-year-old tax laws to impose a retrospective provision for tax on some types of international mergers that may include Vodafone's 2007 acquisition of Hutchinson's mobile assets in India.
"At no point before the transaction concluded and the payment was made did any entity of the Vodafone group receive any communication at any of its business addresses from the Indian tax authorities requesting a payment of withholding tax," the telecom major said on Tuesday.
Reached for comment, the prime minister's office said: "For any queries related to retrospective tax, the concerned ministry is the finance ministry."
The ministry on Tuesday said the proposed changes in tax laws would fetch the government an estimated Rs. 40,000 crore.
The provision has sparked fears among global and domestic investors that this would choke foreign investment in India.
Earlier this month, seven global industry bodies from the US to Japan wrote to Singh, saying the tax threat was "prompting a widespread reconsideration of the costs and benefits of investing in India".