These include rate tweaks in the new income tax regime (sans exemptions), higher capital gains tax on equities, scrapping indexation benefits on property sales, changes in the tax treatment on share buybacks, and a slew of changes in customs tariffs. 

It is hard to grasp the tearing hurry to make drastic changes in direct taxes when a comprehensive review of the Income Tax Act 1961 to make the law lucid and provide tax certainty has been promised. 

The risk is that the budget's proposals may impinge on the remit of the proposed review. A panel set up to rewrite the law, which several of Sitharaman's predecessors have attempted several times without much success, will likely hesitate to touch the budget's proposals.  

Of the changes announced, the big-ticket one is in the capital gains tax regime.  Short-term gains on certain financial assets are proposed to be hiked to 20% from 15%. Long-term capital gains on all financial and non-financial assets will increase to 12.5% from 10%.  

Given that large sections of the lower and middle classes have begun investing, capital gains of more than ₹1.25 lakh a year from some financial assets will be exempt. The government has also proposed changes in the holding period for assets to be classified as short-term or long-term. Unlisted bonds and debentures will attract capital at applicable rates irrespective of the holding period. 

Raising the cost of equity capital could upset investment decisions and the viability of projects in a scenario where the economy direly needs higher investment to spur economic growth.  

Presumably, the reason for raising tax rates on capital gains is to cool retail investor participation in the stock markets, which is worrying the market regulator and policymakers. The latest Economic Survey flagged concerns about the overconfidence (read of retail investors) leading to speculation and the expectation of even greater returns, which might not align with the real market conditions. 

The relative attractiveness of equity returns has also resulted in a slow growth in bank deposits, worrying the Reserve Bank of India. 

The government appears to have been under pressure to tackle the heightened risk that elevated asset prices pose to the economy, something the finance minister alluded to at the beginning of her speech. 

The downside to the changes in the tax treatment is that they do not lead to a more efficient treatment of capital gains. Differential tax treatment between short-term and long-term capital gains—which attract different rates—is clumsy and inefficient.  

Ideally, reform must focus on a holistic and rational way to tax capital gains. A simple way is to remove the distinction between short-term and long-term capital gains based on the period of holding, abolish the securities transaction tax, and include only that portion of capital gains that is not used in any other capital asset as part of taxable income. So, tax would be charged only when assets are sold and converted into income that is used for consumption. 

This roll-over principle has already been accepted in housing. A person who sells a house and invests the proceeds in a new house is exempt from capital gains tax. The same principle should be extended to all other asset churning, particularly in the case of financial assets. 

A higher capital gains tax is a levy on churning, which should not be discouraged. Bringing the roll-over facility to all assets will encourage churning across assets and make the tax treatment more efficient. The budget proposal falls short of real reform then. 

The decision to scrap the angel tax charged on unlisted companies that receive a share premium in excess of the fair market value is long overdue. The levy, introduced in 2012, lost its relevance as it has become easier now for the government to track the source of an investor's funds with Aadhaar. 

Turning to income tax, the new tax regime sans exemptions was introduced in the 2020-21 budget. Barely has that settled down and the government has again lowered the rates to ostensibly put more money in the hands of taxpayers. A salaried employee will save up to ₹17,500 every year in income tax, according to the budget. 

But the new (read lower) concessional tax regime also has six slabs, which is messy. Raising the standard deduction, in a regime that is supposed to phase out exemptions, also goes against the grain of reform. 

India's marginal rate of tax was reduced to 30% in 1997-98, and slabs compressed to three. It has not changed since. Two or three tax slabs are ideal. That will reduce the so-called 'bracket creep', where inflation pushes an individual to pay taxes at a higher rate even if their income may not have risen in real terms. As revenues rise in the medium term, income tax rates must be lowered with the present rates kicking in at a higher threshold of income. 

On indirect taxes, the government has tweaked customs duty on specific products—ranging from mobile phone and related parts, textile and leather products, marine products, minerals, metals, electronics, and petrochemicals—and introduced exemptions on specific inputs to encourage domestic manufacturing of capital goods. Higher tariffs and exemptions go against the grain of reform. 

Would there be checks to ensure there is no contrived value addition (as had happened earlier with mobile handsets)? A more rational approach is to have a low uniform duty across the board so that one line of production is not privileged over another. 

Rates in the goods and services tax regime, too, have seen frequent changes, adding to uncertainty for taxpayers. The instability in India's tax regime must go for the country to attract investment and grow. The finance minister must see reason.