While the new income tax law replaces the Income Tax Act, 1961 and omits 13 offences, 35 actions and omissions continue to attract criminal liability under 13 provisions.
Photograph: Kind courtesy Niti.gov.in
NITI Aayog on Friday released the second paper in its Tax Policy Working Paper Series titled ‘Towards India’s Tax Transformation: Decriminalization and Trust-Based Governance’.
The paper suggests reducing the number of criminal offences from 35 to 6.
It recommends a three-tier reform approach: First, fully decriminalising 12 offences that are administrative or technical in nature; second, retaining criminal liability for 17 offences but only where fraudulent or mala fide intent can be proven; and third, maintaining prosecution for six core offences involving deliberate and high-value tax evasion or fabrication of evidence.
“Criminal provisions should be simple, precise and clear, which means good drafting. So, this report has tackled it in three ways: number one, it has tackled all the 35 sections. It has said only six sections need to be retained fully. What are the reasons?,” NITI Aayog CEO B V R Subrahmanyam while briefing the media
“Because these sections are directly related to either wilful default, or willful tax evasion, or willful false allegations, and deliberately going out of my way to falsify accounts,” Subrahmanyam added.
“So, these sections should be retained. That’s probably the only way that these categories of offences can be handled,” Subrahmanyam stated.
According to him, the working paper is part of a set of 12 tax policy papers that NITI Aayog plans to bring out by December 2025.
Its recommendations are expected to feed into the government’s proposed new Income Tax Act, slated to take effect from April 1, 2026.
The report notes that while the new income tax law replaces the Income Tax Act, 1961 and omits 13 offences, 35 actions and omissions continue to attract criminal liability under 13 provisions.
All these offences are punishable with imprisonment and fine, and in 25 cases, the law mandates minimum jail terms.
‘While these measures are intended to safeguard state revenue and deter evasion, the continuing breadth of criminalisation, compounded by a presumption of culpable mental state, signals an ongoing reliance on criminal law as a routine enforcement tool rather than a targeted last resort,’ the paper said.
Applying a principle-based framework grounded in jurisprudence and global best practices, the report concludes that many of these offences — such as delayed filing of returns, procedural lapses, or failure to provide information — do not cause direct or substantial harm to fiscal interests, and can be better addressed through civil penalties.
Among other proposals, the paper calls for the removal of mandatory imprisonment provisions, restoration of judicial discretion in sentencing, and elimination of the reverse burden of proof, which currently presumes the taxpayer’s culpable intent.
It also suggests introducing flexible sentencing with non-custodial alternatives for first-time, or low-level offences, and setting up a mechanism for periodic legislative review of criminal provisions.
Citing global examples from the US, the UK and Australia, the report says most mature tax systems reserve prosecution for deliberate and fraudulent offences, and deal with routine non-compliance through administrative or monetary penalties.
India, it notes, could benefit from adopting a similar trust-based model.
The recommendations build on the government’s ongoing reforms under the Transparent Taxation – Honouring the Honest platform and the Jan Vishwas Act (2023), which aim to simplify compliance and reduce criminalisation of business laws.
“Criminal sanctions, when indiscriminately imposed, stimulate a climate of fear and inhibit genuine entrepreneurial activity while also overburdening the judicial apparatus with matters better addressed through civil or administrative remedies,” said Sandeep Jhunjhunwala, tax partner at Nangia Andersen LLP.
“By recalibrating the punitive paradigm, decriminalisation could enhance voluntary compliance, streamline enforcement mechanisms, and align regulatory frameworks with principles of proportionality and economic pragmatism,” added Jhunjhunwala.
Feature Presentation: Ashish Narsale/Rediff
