Vodafone had won a case against India in The Hague on retrospective tax last September.
The Indian government on Thursday proposed to refund companies in disputes over retrospective tax, including telecoms operator Vodafone and energy giant Cairn, after a string of setbacks in international litigation.
The tax raised for the indirect transfer of Indian assets before May 2012 would be "nullified on fulfilment of specified conditions" such as the withdrawal of pending litigation and an undertaking that no damages claims would be filed, a government statement said.
The dispute began in 2012 after the then Congress-led coalition government decided to impose capital gains tax retrospectively on some companies, such as Vodafone and Cairn, which took their cases to arbitration and won.
The cases were met with a huge outcry among foreign investors and also dealt a blow to the government of former Prime Minister Manmohan Singh, who lost power in a 2014 election to Prime Minister Narendra Modi.
PM Modi's government later went on to say it would not make retrospective tax claims in future but has been defended outstanding cases for years.
Last month, Cairn Energy said a Paris court had accepted its petition that Indian government-owned assets in the city worth over 20 million euros be frozen, claiming a significant win in its campaign to force the Indian government to pay billion-dollar damages in the protracted tax dispute.
A French tribunal ordered the freeze on some 20 centrally located properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn, the London-listed firm said.
Cairn said it has also registered similar claims against India in courts in the United States, Britain, the Netherlands, Singapore and Canada. The US case involved a bid to take over assets belonging to Air India and may have resulted in India effectively losing its flag carrier.
Cairn, which has oil and gas operations in India, was awarded damages of more than $1.2 billion, plus interest and costs, in December by the Permanent Court of Arbitration at The Hague in a long-drawn-out tussle with the Indian government over certain retrospective tax claims. Cairn has said it is now owed $1.7 billion in total.
Last year in September, Vodafone had won a similar case against India in The Hague against a $2 billion tax claim, with the tribunal ruling it was in a breach of an investment treaty agreement between India and the Netherlands.
However, with India moving to challenge the rulings, the cases continued to endanger investor confidence and fuel a pushback.
This week, Kumar Mangalam Birla, the billionaire non-executive chairman of Vodafone's India joint venture Vodafone Idea, stepped down, fuelling concerns that the wireless carrier may not survive the hefty bill owed to the government.
The announcement, coupled with an offer by Mr Birla in June to sell his Aditya Birla Group's 27 per cent stake in the telecoms carrier to keep it afloat, renewed scrutiny and criticism of the government's policy on retrospective taxes.
Besides Vodafone and Cairn, India has faced a string of arbitrations by investors including Deutsche Telekom and Nissan Motor Co over issues ranging from retrospective taxation to payment disputes.
(With inputs from Reuters)