CNBC's Inside India newsletter: The tax with potential side effects

This report is from this week's CNBC's "Inside India" newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe  here.

In 1696, King William III of England introduced a radically new tax on his subjects to raise state revenues: under the decree, every household in the country would pay a levy depending on the number of windows in their home. This typically meant that the larger the house, the greater the tax due on it.

Despite its progressive intentions, the tax failed to raise sufficient revenue for the monarch, as people boarded up their windows to lower their tax liability. Over the long term, the policy was a net negative for the state, which had to battle typhus, smallpox and cholera epidemics resulting from the lack of ventilation.

So, what does the window tax have to do with India today?

Earlier this week, India's finance minister surprised markets with a measure she said will "deepen the tax base."

Nirmala Sitharaman, delivering her seventh Budget, raised the tax on trading futures and options to 0.02% and 0.1%, respectively — marking a 60% hike. In addition, the minister also lifted capital gains for stock market investors who cash in within a year from 15% to 20%. Long-term investors will also pay a revised rate of 12.5% on gains, up from 10%.

Borrowing a page from 17th century England, India's finance ministry hopes to enact a behavioral change with the levy and stamp out the "unchecked explosion" in the derivatives market, where retail investors account for 41% of total trading volumes.

What may become a cause of government concern is if stock market traders attempt to lower their tax