Finance Minister Pranab Mukherjees controversial move to amend the Income tax act with retrospective effect from

1962 , to bring under its ambit of taxation all overseas merger and acquisition deals, remains a flawed decision on two fronts. Firstly, it sends out a strong signal of executive bullying. The move by Mukherjee goes a long way in undermining the legal process and the rule of law in the country. Seeking to move an executive amendment in the Income Tax Act, post the Vodafone judgment is akin to upending the Vodafone order passed by the Supreme Court. The entire focus of tax legislation today is to clamp down on tax avoidance which resort to various artificial and coloured devices. The need is to differentiate strategic tax planning from tax avoidance. Even with the Mcdowells case, it was held that tax planning might be
legitimate within the framework of law and only avoidance of tax by resorting to dubious methods is to discouraged. However, Mukherjee by passing a blanket resolution has in one stroke removed all space for any rational and strategic tax planning. The move, if adopted, will put all merger and acquisition deals post 1962 under the income tax scanner, and will most probably end up damaging the investor climate in India. Justice Radhakrishanan, while recording his judgment in the Vodafone matter, incidentally speaks on the necessity of FDI in India. He states: The question involved in this case is of considerable public importance, especially on FDI, which is indispensable for a growing economy like India. Foreign investments in India are generally rounded through the countries with whom India had entered into treaties. Overseas investments in Joint Ventures(JV) and Wholly Owned Subsidiaries(WOS) have been recognized as important avenues of global business in India. The Justice further records the institutions most likely to use the instrument of off-shore finance, which include international companies, individuals, investors and others and capital flows through FDI, Portfolio Debt Investment and Foreign Potfolio Equity Investment. Secondly, the negative impact of such a move could very well go beyond the possible revenue benefits that can accrue to the kitty of the government. With the investment atmosphere running at quite a low and the markets just barely managing to recover from the shock of the 2008 recession scenario, Mukherjee would deal a deadly blow to market sentiment in general and will succeed in scaring long-term, infrastructure oriented projects in India.