In a significant move aimed at reshaping India’s tax enforcement landscape, NITI Aayog has proposed sweeping reforms to decriminalise a wide range of income tax-related offences and usher in a more trust-based compliance regime. The recommendations, part of a working paper titled “Towards India’s Tax Transformation: Decriminalising and Trust-Based Governance”, reflect a strong shift away from India’s historically stringent approach to taxpayer defaults — an approach rooted in the belief that the “prospect of jail” ensured discipline.Over the years, India’s tax laws have been laden with criminal provisions even for relatively minor or procedural lapses. “The now-revamped Income-tax Act, 2025, still contains 35 criminal offences across 13 provisions, many of which relate not to fraud but to technical non-compliance. NITI Aayog’s paper argues that such over-criminalisation increases fear, discourages investment and imposes disproportionate consequences, including disqualification from public employment, voting restrictions and reputational damage,” states Sudhir Kapadia, Senior Advisor, EY. The four pillars of criminalisationThe think tank sets out four foundational principles that should guide criminalisation under tax law:
- Protection of fundamental societal values – including national security, law and order and property.
- Clear and substantial harm – only acts that cause direct, measurable harm deserve criminal sanction.
- Criminal law as a last resort – used only when civil or administrative measures are ineffective.
- Proportionality of punishment – penalties must reflect intent and severity, distinguishing deliberate fraud from bona fide error.
It also sets out guiding principles on drafting of criminal provisions like avoid overlap with general criminal statutes, pre-legislative assessments, respect for constitutional rights, clear and precise drafting and periodic review to avoid redundancy and overreach.These principles echo international practice in countries such as the US, UK and Germany, where prosecution is typically reserved for willful tax fraud and not for technical lapses.What NITI Aayog wants decriminalisedApplying these principles, the paper classifies the existing offences under three buckets — fully decriminalise, partially decriminalise, and retain criminality for serious misconduct.Recommended Classification of Offences
One of the most debated provisions relates to failure to furnish a return of income. Today, failure to file returns in cases involving tax liability above ₹10,000 (NIL for companies) can trigger prosecution. The paper argues that return-filing delays often stem from genuine hardship or technical glitches and do not automatically indicate intent to evade. Such cases, it says, should attract penalties, not imprisonment.In contrast, willful falsification of entries or fraudulent transfer of assets to defeat tax recovery clearly undermine the country’s fiscal foundation. These, the paper says, should remain criminal but applied proportionately, reserving imprisonment for egregious conduct.“Prosecuting taxpayers merely for missing a filing deadline—often due to genuine hardship or technical glitches—neither deters evasion nor strengthens compliance. The real focus of criminal law must be on deliberate acts like falsifying books or moving assets to defeat recovery. Those are the offences that truly erode fiscal integrity and warrant proportionate punishment,” says Kapadia. A case for rethinking punishmentThe paper flags several concerns around India’s current punishment framework:
- Mandatory minimum imprisonment exists in 25 of 35 offences – nearly 71% – compared with just 13% in comparable central laws. This, the paper argues, strips courts of much-needed discretion.
- Excessive imprisonment terms: 38% of tax offences carry jail terms of up to seven years, equating minor tax lapses with serious crimes under the Bharatiya Nyaya Sanhita (BNS).
- Overuse of rigorous imprisonment: Nearly all offences mandate rigorous imprisonment, although even grave crimes elsewhere allow judicial choice.
- Presumption of guilty intent: The Act presumes culpability wherever mens rea is required, placing the burden on the accused — a standard generally reserved for serious offences like narcotics or child protection laws.
To address these distortions, the paper recommends abolishing mandatory minimum sentences by restoring judicial discretion, aligning punishment tenures with the BNS, removing presumptions of guilt and rewriting provisions using the SARAL drafting principle — Simple, Accessible, Rational and Actionable Law.The recommendations echo the government’s wider Jan Vishwas initiative to decriminalise minor offences across sectors and promote ease of doing business. They also build on the redesigned Income-tax Act, 2025, which has already removed criminality from 13 offences.According to Kapadia, the idea is clear: replace a fear-driven compliance model with a cooperative one, where punitive action is targeted at deliberate wrongdoers rather than honest taxpayers who commit non-intentional lapses.The Road AheadWhile the proposals represent a major policy shift, their success will depend heavily on strengthening civil and administrative enforcement. Without this, habitual offenders might exploit relaxed criminal provisions and shield intentional evasion as “technical error.”Striking the right balance – leniency for genuine taxpayers and strong deterrence for willful evaders – will be the real test of the reforms.India’s tax ecosystem appears to be inching closer to a trust-based governance model. If introduced in Budget 2026 and implemented well, the proposed changes could reduce fear, improve compliance and enhance India’s appeal as a global investment destination.
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