Establish a modern tax framework for trust-based governance: Niti Aayog

NITI Aayog has proposed a series of reforms in the Income Tax Act, 2025 including decriminalisation of minor infractions, removal of excessive mandatory minimum sentences and reducing the overall terms of imprisonment to make India’s tax administration more predictable and less coercive.

“Decriminalisation, rationalisation of punishments, and emphasis on proportionate sanctions will collectively align India’s income-tax law with the vision of a fair, accessible, and modern compliance regime,” the Aayog said in its Tax Policy Working Paper Series - II: Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance, released on Friday.

The focus is to drive a transition from coercive compliance to a model that empowers taxpayers, differentiates between error and fraud, and deploys the criminal law only when vital public interests are at stake.

As per the report, the Income-tax Act, 2025 continues to criminalise 35 actions and omissions across 13 provisions. All these offences are punishable with imprisonment and fine, and for 25 of them, the Act prescribes mandatory minimum imprisonment terms, it said.

“Of the 35 criminal offences identified, 12 should be fully decriminalised and addressed through civil or monetary penalties alone, including a range of administrative and technical defaults,” it suggested.

The Aayog further said 17 offences should retain criminal liability only for fraudulent or malafide intent while six core offences, involving deliberate, high-value, and injurious misconduct (such as orchestrated tax evasion or fabrication of evidence), should remain criminal with proportionate punishments.

“Remove mandatory minimum imprisonment for most offences, permit courts to choose between fines and imprisonment, restore the prosecution’s duty to demonstrate wilful or fraudulent intent beyond reasonable doubt, simplify and clarify offence definitions and establish mechanisms for regular review of criminal provisions to eliminate redundant or obsolete offences over time,” it further suggested.

The Aayog is of the view that implementation of these recommendations will embed trust at the heart of India’s tax administration, encouraging voluntary compliance and ensuring that criminal prosecution remains the exception, not the norm.