The Unexpected Tax
India's Budget 2026, largely met with widespread approval and described as businesslike and calm, contained an unexpected 'googly'—a retrospective tax
on capital gains derived from Sovereign Gold Bonds (SGBs). This move, effective from April 2026, targets profits made from SGBs purchased when gold prices were considerably lower. The SGB scheme, initiated in 2015-16 and discontinued in 2024 prior to a significant international gold price surge, operated on an agreement where investors exchanged paper gold for paper money upon sale, with capital gains and losses being their sole responsibility, and no tax being levied. The imposition of a 12.5% long-term capital gains tax on these bonds, particularly after the parabolic rise in gold prices, has drawn sharp criticism for its fairness and impact on investor sentiment.
Questionable Rationale
The government's decision to implement a retrospective tax on SGBs has been labeled as greedy, unfair, petty, and counterproductive. The projected revenue from this tax is a mere Rs 200 crore annually, accounting for a minuscule 0.005% of the projected tax receipts for 2025-26. This insignificant financial gain pales in comparison to the substantial benefits the government has reaped from the SGB scheme. By encouraging SGBs, India reduced its reliance on physical gold imports, thereby bolstering its current account balance and contributing to a stable rupee. Furthermore, the government benefited immensely from borrowing funds at a low annual interest rate of 2.5% through SGBs, a significantly more favorable rate than the market alternative of 7%. The author argues that the pursuit of Rs 200 crore more at the expense of investor confidence and the broader economic advantages gained from the scheme is a policy decision that defies logic.
Investor Confidence Impact
Retrospective taxation is fundamentally viewed as a flawed policy, both morally and in practice, and it casts a long shadow over India's decision-making processes. This particular tax on SGBs has exacerbated an already precarious investment climate. India has been grappling with a significant decline in private investment, which has fallen by approximately 10 percentage points from its peak of 30% of GDP. This downturn is characterized by Indian capital seeking opportunities abroad while foreign investment shuns the country, evidenced by falling and barely positive net FDI, reaching historic lows. The author points to past instances of retrospective taxation, like the UPA's actions in 2012 and the BJP's 2015 Model Bilateral Investment Treaty, as key factors that have damaged the investment climate. These policies have made it difficult for foreign investors to operate, leading them to withdraw their capital. The new retrospective tax on SGBs only serves to deepen this mistrust and disincentivize both domestic and international investors.
Broader Policy Landscape
Beyond the controversial SGB tax, Budget 2026 is otherwise commended for its forward-thinking approach to policy formulation. Major economic reforms, such as income tax adjustments and GST reforms, were proactively announced well in advance of the budget, signaling a shift towards greater transparency. This marks a departure from the historically secretive budget-making process, a relic of colonial times, which the author advocates should be replaced with a more open and collaborative model. Additionally, India has demonstrated a welcome move towards greater economic openness through recent trade deals and a potential shift in deregulation policies, aligning with recommendations from NITI Aayog reports. These positive developments, however, are overshadowed by the negative impact of the retrospective tax, which undermines the credibility of India's commitment to a stable and predictable investment environment.
