In New Delhi on Friday, NITI Aayog released the second paper in its Tax Policy Working Paper Series titled “Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance.” The report marks one of the most comprehensive efforts yet to reshape how India treats tax non-compliance—shifting focus from criminal prosecution to civil accountability.
The paper argues that India’s current fiscal regime is overly reliant on criminal sanctions, creating an atmosphere of fear rather than compliance. The think tank proposes that twelve tax-related offences—many of them administrative, technical, or procedural—be decriminalised and replaced with civil or monetary penalties.
Underlying this recommendation is a broader philosophical shift: the transition from a “presumption of guilt” to a “presumption of trust.” By transferring the burden of proof from the taxpayer to tax authorities, the paper suggests India can build a more credible and cooperative tax administration that encourages voluntary compliance rather than coerced obedience.
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Reforming an Over-Criminalised Tax System
The report critiques the Income-tax Act, 2025, which criminalises as many as thirty-five distinct acts and omissions—ranging from minor errors in filings to procedural delays. Under the current framework, even unintentional lapses can attract prison terms of up to seven years.
NITI Aayog notes that this “excessive reliance on criminal law” for technical non-compliance has created disproportionate punishments, administrative congestion, and widespread taxpayer anxiety. By presuming a “culpable mental state” in nearly all offences, the law effectively places the burden of proof on the taxpayer—a principle the think tank calls regressive and counterproductive.
The new proposal aims to reserve criminal prosecution only for cases involving fraudulent intent or mala fide conduct. It explicitly distinguishes honest errors from deliberate evasion and advocates that criminal liability should arise only when fraudulent intent is proven beyond reasonable doubt.
Proportional Penalties and Judicial Discretion
NITI Aayog’s reform blueprint goes beyond mere decriminalisation—it seeks to introduce proportionality into sentencing and restore judicial discretion. The paper recommends removing mandatory minimum imprisonment terms, allowing judges to choose between simple or rigorous imprisonment depending on the gravity of misconduct.
For high-value or egregious offences—such as orchestrated tax evasion, fabrication of evidence, or willful falsification of accounts—the report supports retaining stringent criminal provisions. However, it insists that penalties should be “proportionate to harm,” ensuring that small businesses and individuals are not subject to the same punitive framework as systemic offenders.
The approach mirrors modern fiscal jurisprudence adopted by OECD nations, where tax law distinguishes between error and intent, prioritising correction and deterrence over punishment.
Guidance for Implementation and Institutional Discipline
To ensure consistent application, the report proposes the creation of a Guidance Note for Prosecution of Income Tax Cases. These guidelines, intended for tax officers, stress that prosecution should be invoked only after civil remedies are exhausted and when deliberate misconduct is demonstrably proven. The note also provides draft statutory language to assist in amending relevant provisions of the Income-tax Act, 2025.
The framework envisions a multi-tier enforcement strategy:
- Civil Penalties for correctable defaults;
- Monetary Sanctions for repetitive or negligent conduct; and
- Criminal Prosecution only for intentional and high-value fraud.
In addition to this paper, NITI Aayog had earlier proposed an optional presumptive tax regime for foreign entities—another signal of India’s ongoing pivot toward simplicity, predictability, and global competitiveness in taxation.
Together, these reforms mark a philosophical reorientation of India’s fiscal governance—from a system built on suspicion and control toward one anchored in trust, proportionality, and fairness.
