Budget 2026's Retrospective Tax Move Draws Sharp Criticism
While the Union Budget 2026 received widespread praise for its businesslike and calm approach, with over 95% approval ratings from commentators, a hidden provision has emerged as a major point of contention. The budget includes a retrospective tax on capital gains from sovereign gold bonds (SGBs), set to take effect from April 2026, which has been labeled as greedy, unfair, and counterproductive by experts.
The Googly in the Budget: A New Retrospective Levy
Amid the initial euphoria, the budget delivered what Surjit Bhalla describes as a wicket-taking googly—a new tax on capital gains made through the purchase of SGBs. These bonds were introduced in 2015-16 when gold prices were low and stable, with the scheme halted in 2024 before the recent surge in gold prices. Originally, the terms allowed investors to buy paper gold and receive paper money upon sale, with no tax on gains or compensation for losses. Now, retrospectively, investors will face a 12.5% long-term capital gains tax due to the price increase.
This move has been criticized as reflecting a petty and counterproductive attitude from the government, akin to the saying, What is mine is mine—what is yours is also mine. Beyond moral objections, retrospective taxes are seen as damaging to investor confidence, with this particular tax expected to net only about Rs 200 crore annually—a mere 0.005% of India's tax receipts in 2025-26.
Broader Implications for Policy and Investment Climate
The introduction of this tax highlights deeper issues in India's budget-making process. Bhalla argues that retrospective taxes reflect poorly on decision-making, calling for a more open and collaborative approach rather than the secretive methods inherited from colonial times. He emphasizes that excluding this tax, Budget 2026 showcases good policymaking, with major reforms like income tax and GST changes announced beforehand and trade deals opening up the economy.
However, the retrospective tax exacerbates an already challenging investment climate. Private investment in India has declined, with its share in GDP down by 10 percentage points from a peak of 30%. Net foreign direct investment (FDI) is at its lowest level since 1990, and recent months have seen negative flows. This downturn is attributed partly to past policies, such as the UPA's retrospective taxation in 2012 and the BJP's Model Bilateral Investment Treaty of 2015, which imposed stringent conditions on foreign investors.
Call for Reform and Transparency
Bhalla advocates for ending retrospective taxes and adopting transparent budget preparations to restore investor trust. He points out that the government has benefited significantly from SGBs, including reduced gold imports and lower borrowing costs, making the additional tax revenue seem unnecessary. The focus should be on fostering a stable environment to attract both domestic and foreign investment, crucial for achieving Viksit Bharat goals.
In summary, while Budget 2026 has many positive aspects, the retrospective tax on gold bonds stands out as a misstep that could undermine economic progress and confidence in India's policy framework.
