In a landmark proposal set to redefine India's tax administration, the government's premier policy think tank, NITI Aayog, has called for sweeping reforms to decriminalise a wide spectrum of income tax-related offences. The recommendations aim to pivot the nation's tax governance from a historically stringent, punishment-oriented model towards a more collaborative and trust-based compliance regime.
The Core Philosophy: From Fear to Trust
The proposals are detailed in a working paper titled “Towards India’s Tax Transformation: Decriminalising and Trust-Based Governance”. This document signals a profound philosophical shift, moving away from the long-held belief that the threat of imprisonment is the primary tool for ensuring taxpayer discipline. According to Sudhir Kapadia, Senior Advisor at EY, India's tax laws have historically been overloaded with criminal provisions, even for minor procedural mistakes.
The revamped Income-tax Act, 2025, still contains 35 criminal offences across 13 provisions, many targeting technical non-compliance rather than outright fraud. NITI Aayog argues this over-criminalisation fosters fear, deters investment, and leads to disproportionate consequences like disqualification from public office and reputational harm.
Four Pillars for Rational Criminalisation
The think tank has established four foundational principles that should guide the use of criminal law in taxation:
- Protection of Fundamental Societal Values: Criminal law should safeguard national security, law and order, and property.
- Clear and Substantial Harm: Only acts causing direct, measurable harm should face criminal sanctions.
- Criminal Law as a Last Resort: It should be invoked only when civil or administrative penalties prove ineffective.
- Proportionality of Punishment: Penalties must match the intent and severity of the act, clearly distinguishing deliberate fraud from honest errors.
These principles align with international standards in countries like the US, UK, and Germany, where prosecution is typically reserved for willful tax fraud.
Which Offences Could Be Decriminalised?
Applying its principles, the paper categorises existing offences into three groups:
12 Offences to Fully Decriminalise: These are largely procedural or technical lapses, such as failure to file returns on time or non-payment of TDS/TCS. The rationale is that these acts cause no direct harm and currently attract disproportionate punishment.
17 Offences to Partially Decriminalise: This category includes acts where intent is crucial, like underreporting income or false verification. Criminal liability would apply only if done fraudulently. The paper also suggests raising the threshold for rigorous imprisonment from ₹0.25 crore to ₹1 crore.
6 Offences to Retain as Criminal: These cover serious, willful misconduct like fraudulent removal or concealment of property to defeat tax recovery. Such acts cause clear harm to public revenue and require criminal intent (mens rea).
A key example is the offence of failing to furnish an income return. Currently, prosecution can be triggered if the tax liability exceeds ₹10,000. The paper argues that delays often stem from genuine hardship or technical issues, not an intent to evade, and should thus incur penalties, not jail time.
Rethinking Punishment: A Call for Judicial Discretion
The paper highlights significant flaws in India's current punishment framework for tax offences:
- Mandatory minimum imprisonment exists for 71% (25 out of 35) of tax offences, stripping courts of discretionary power.
- Excessive jail terms: 38% of offences carry prison sentences of up to seven years, equating minor lapses with serious crimes under the Bharatiya Nyaya Sanhita (BNS).
- Overuse of rigorous imprisonment is mandated for nearly all offences.
- Presumption of guilty intent places an unfair burden of proof on the accused.
To correct this, NITI Aayog recommends abolishing mandatory minimum sentences, aligning punishment durations with the BNS, removing presumptions of guilt, and adopting the SARAL (Simple, Accessible, Rational and Actionable Law) drafting principle.
The Road Ahead and Potential Impact
These recommendations are part of the broader Jan Vishwas initiative to decriminalise minor offences and improve the ease of doing business. They build upon the Income-tax Act, 2025, which already removed criminality from 13 offences.
The ultimate goal, as articulated by Kapadia, is to replace a fear-driven model with a cooperative one, where punitive action is precisely targeted at deliberate wrongdoers, not honest taxpayers making unintentional errors.
However, the success of this major policy shift hinges on strengthening civil and administrative enforcement mechanisms. Without robust alternative deterrents, habitual offenders might exploit relaxed criminal provisions by shielding intentional evasion as mere "technical error."
If introduced in the Budget 2026 and implemented effectively, these reforms could significantly reduce fear among taxpayers, improve voluntary compliance, and enhance India's attractiveness as a stable and rational global investment destination.
