The Budget has delivered a googly — the retrospective tax

Indian Express

Context and Central Thesis

The article argues that while Budget 2026 has largely followed sound policy sequencing and reform logic, it is fundamentally undermined by the reintroduction of a retrospective tax—this time through capital gains taxation on Sovereign Gold Bonds (SGBs). This single provision, according to the author, negates much of the goodwill generated by the rest of the Budget.

Key Arguments in the Article

Retrospective taxation is intrinsically flawed
The author treats retrospective tax as bad economics, bad governance, and bad ethics. It violates certainty, predictability, and fairness—three pillars of credible fiscal policy.

Negligible revenue, disproportionate damage
The expected revenue gain (around ₹200 crore annually) is trivial relative to total tax receipts, yet the damage to investor confidence and policy credibility is substantial and long-lasting.

Breach of trust in Sovereign Gold Bonds
SGBs were sold to citizens with explicit tax assurances. Changing tax treatment after issuance amounts to reneging on a sovereign promise, weakening trust in government-backed instruments.

Contradiction within an otherwise reformist Budget
The article acknowledges positive policy signals—prior income tax reform, ongoing GST reform, and trade liberalisation outside the Budget—but highlights that the retrospective tax sharply contradicts this reform narrative.

Domestic policy choices hurt investment more than global factors
The author rejects the argument that weak private investment is mainly due to global uncertainty. He links declining private investment and weak FDI inflows to domestic actions such as retrospective taxation and flawed investment treaty frameworks.

Author’s Stance

The author adopts a strongly critical and reform-oriented stance. He is unequivocal that retrospective taxation should be avoided as a matter of principle, not merely refined or softened. His position reflects a belief in rule-based governance, investor trust, and long-term economic credibility over short-term fiscal expediency.

Biases and Underlying Perspective

Pro-market and investor-centric bias
The analysis prioritises investor confidence and capital formation, while giving limited attention to redistributive or sovereignty-based justifications for taxation.

Institutional scepticism
There is a clear scepticism toward political leadership and senior bureaucracy, portrayed as overconfident in state power and insufficiently sensitive to credibility costs.

Selective framing
The article foregrounds private investment decline while underplaying fiscal pressures, political compulsions, and equity considerations that governments often cite.

Pros and Cons of the Retrospective Tax Measure

Pros

• Marginal increase in tax revenue
• Uniform taxation between paper gold and physical gold
• Signals intent to widen the tax base

Cons

• Erosion of trust in government assurances
• Negative signalling to domestic and foreign investors
• Reinforces policy unpredictability
• Disproportionate reputational cost relative to revenue
• Potential legal and arbitration risks

Policy Implications

Fiscal policy credibility
Retrospective taxation weakens confidence in medium-term fiscal planning and reform commitments.

Investment climate
It discourages long-term household and private investment, particularly in government-sponsored instruments.

Governance reform
The episode underlines the need for transparent, consultative Budget-making rather than opaque, last-minute policy changes.

Rule of law
Raises concerns about arbitrariness in taxation and violation of legitimate expectations—core constitutional principles.

Real-World Impact

• Household investors may shift away from sovereign instruments
• Private sector investment sentiment weakens further
• Foreign investors perceive higher policy risk
• Economy continues to face stagnation in private capital formation

UPSC GS Paper Alignment

GS Paper II

• Accountability and transparency in governance
• Rule of law and non-arbitrary state action

GS Paper III

• Tax policy and economic growth
• Investment climate and capital formation
• Financial instruments and savings behaviour

Essay Paper

• Policy certainty as a prerequisite for economic growth
• Ethics and fairness in public finance

Balanced Conclusion and Future Perspective

The article persuasively establishes that retrospective taxation, even when fiscally insignificant, carries outsized economic and reputational costs. Budget 2026 demonstrates otherwise sound policymaking, but the SGB tax provision undermines its credibility.

For India’s long-term growth ambitions, retrospective tax should be treated not as a technical instrument but as a red line. Sustainable revenue mobilisation must rest on trust, predictability, and growth—not on reopening settled promises.