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Vodafone India, a subsidiary of Vodafone Group plc (VOD - Analyst Report), has received a tax reminder of $2 billion related to a disputed tax issue on acquiring the assets of an Indian mobile company. Issues surrounding one of Vodafone’s most promising markets not only calls for further financial distress in an already stressful economy, but also creates uncertainty over it future in that region.

The problem dates back to 2007, when Vodafone Group Plc acquired the stakes of Hong-Kong based, Hutchison Telecommunications International Limited in an Indian mobile company –– Hutchison Essar Ltd. The transaction, which took place through a Netherlands-based subsidiary of Vodafone Group, resulted in the company acquiring a 67% stake in Hutchison Essar Ltd. and gaining total control over Hutchison’s Indian operations.

The Indian Supreme Court bailed out Vodafone last year, stating it does not hold any tax liability on transactions taking place overseas. However, the Indian tax authorities seem to think otherwise and changed the country’s tax law retrospectively in 2012 to levy the tax on Vodafone. The case is still pending, with nothing much being done in this regard.

We believe that if the case does not work in favor of Vodafone, it may also hurt investment prospects as much of the liquidity will have to be shelled out on regulatory charges. This may ultimately forestall growth in one of its key markets. As of September 30, 2012, the company had 153 million mobile subscribers in India –– the largest mobile customer base under its coverage across the globe.

Given the growth trajectory, the company is accelerating its investments in India in building infrastructure. In recently published reports, the company stated that it invested approximately INR 10 billion in 2012 in major cities like Delhi, Mumbai and Kolkata.

Based in Newbury, United Kingdom, Vodafone Group is the world’s largest revenue generating wireless communications operator and the second largest carrier after China Mobile Limited (CHL - Snapshot Report) based on subscription.

For the short term (1–3 months), Vodafone has a Zacks #2 Rank, implying a Buy rating. For the long term, we have a Neutral recommendation on the stock.

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