Vodafone has a $2 billion Indian headache

Mobile services provider Vodafone (VOD, quote) traded lower today as the result of concerns over a potential tax liability to the Indian government.

Image courtesy Sudhamshu Hebbar: http://www.flickr.com/people/sudhamshu/In 2007, Vodafone enhanced its position on the Indian subcontinent when it took over local telco Hutchison Essar. This acquisition has helped make Vodafone the third largest carrier in India today.

Although the venture has been a commercial success for the English company, Vodafone has recently encountered difficulties in India as the result of proposed protectionist measures from the government.

The suggested law in question would not only levy a tax on future acquisitions of domestic firms by foreign multinationals, but it would retroactively tax previous mergers that involve a transfer of Indian assets as well.

As a result, Vodafone is facing a $2 billion bill from the Indian government.

While this law may be unnecessarily pernicious towards Vodafone, it could also have far-ranging ramifications for the entire Indian economy.

A number of sectors lag global peers because of protectionist measures implemented by the government, such as restricting foreign acquisitions in sectors like retail and aviation. Increased hostility towards multinationals such as Vodafone that already have a presence in India will only reinforce the perception that the Indian government is not friendly to foreign firms.

This development has pressured VOD shares today with the stock down 1.17% on the day. Fortunately for VOD investors, this levy has little chance of spiraling further. Even if the penalty is enforced, it will likely have little long-term effect on the stock.

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