Last Updated on October 10, 2025 8:16 pm by INDIAN AWAAZ
R. Suryamurthy
India’s much-touted new direct tax law, the Income-tax Act, 2025, retains a punitive streak that contradicts the government’s promise of a “trust-based” regime, according to a new NITI Aayog working paper that calls for a radical overhaul of criminal provisions and tighter checks on digital powers granted to tax officers.
In its report, “Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance”, the government think tank praises the Act’s modernisation drive but warns that the “fear of prosecution” remains embedded in 35 criminal offences that could ensnare even honest taxpayers.
While the 2025 law repeals several archaic sections of the 1961 Act, the paper argues it still “criminalises errors, not just evasion.” Mandatory imprisonment and presumptions of guilt, it says, invert the basic principles of justice and risk deterring compliance rather than encouraging it.
NITI Aayog’s review found that 13 offences from the old Act — including failures by liquidators or receivers to file notices and procedural lapses in administrative filings — have been fully decriminalised. These will now be handled administratively under civil penalty frameworks, echoing the spirit of the Jan Vishwas Act (2023), which aimed to weed out jail terms for minor business violations.
But the retention of 35 offences across 13 provisions, many with mandatory imprisonment clauses, marks what the paper terms “a continuity of coercion.”
Decriminalised vs. Retained: A Mixed Record
| Decriminalised (Omitted from 2025 Act) | Retained (Still Criminal Offence) |
| Failure by liquidator/receiver to notify appointment (Old S. 276A) | Failure to pay TDS/TCS despite deduction (S. 476–477) |
| Non-surrender of property under pre-emptive acquisition (Old S. 276AB) | Wilful attempt to evade tax or payment (S. 478) |
| Administrative defaults, minor delays in filings | Wilful failure to file returns or produce documents (S. 479, 480–481) |
| Technical breaches with no fiscal loss | Compelled disclosure of passwords, digital keys (S. 474) |
| Procedural lapses during winding-up | Fraudulent concealment or falsification of books (S. 475, 483) |
| — | Abetment or aiding false returns (S. 484) |
| — | Breach of confidentiality by tax officials (S. 494) |
Source: NITI Aayog Working Paper, October 2025.
The think tank proposes a three-tier enforcement model:
- Full decriminalisation for 12 administrative lapses.
- Selective criminalisation for 17 offences only if fraudulent intent is proven.
- Retention of criminal penalties for six deliberate, high-value frauds.
It also recommends restoring judicial discretion, scrapping the reverse burden of proof, and mandating a periodic legislative review to prune obsolete offences.
Digital Powers Under Scrutiny
The paper’s most pointed criticism targets the new Act’s digital enforcement clauses — notably Sections 247 and 474, which authorise officers to demand access credentials, decryption keys, and “reasonable technical assistance” from taxpayers during probes.
Failure to comply could invite up to two years’ imprisonment, effectively extending physical search powers into virtual domains.
“This amounts to compelled digital transparency,” the report warns, adding that such powers “risk transforming tax enforcement into digital surveillance.”
Unlike countries such as the UK or Australia, where such intrusive powers apply only in cases of national security or organised crime, India’s version covers even routine tax assessments — a move NITI Aayog calls “constitutionally precarious.”
It cites Article 20(3) of the Constitution, which protects individuals from self-incrimination, and references CBI v. Mahesh Kumar (2022), where a court held that revealing a password is a “mental act.” Forcing such disclosure, the paper says, crosses a constitutional line.
Trust Deficit in a Modernised Framework
Despite simplification and digitalisation, India’s tax regime still “views the taxpayer through the lens of suspicion,” the paper argues. The inclusion of a ‘culpable mental state’ clause (Section 490) presumes guilt unless innocence is proven — a reversal of the presumption of innocence that underpins modern democracies.
Such coercive elements, it warns, undermine voluntary compliance and tarnish India’s investor-friendly image. “True reform,” the report says, “lies not in rewriting the statute but in rewriting the relationship between the state and the taxpayer.”
Economic Rationale and Global Practice
Globally, criminal prosecution in tax matters is confined to wilful and egregious fraud. In the US, UK and Australia, procedural lapses attract fines, not jail. NITI Aayog suggests that aligning with this global norm would reduce litigation, lighten court caseloads, and improve compliance through behavioural incentives rather than fear.
“Over-criminalisation breeds tax terrorism,” one senior NITI official is quoted as saying off-record in the report, “and deterrence must not degenerate into distrust.”
Reform within Reach
The paper’s foreword by NITI Aayog CEO B.V.R. Subrahmanyam stresses that “trust-based governance is not leniency but intelligent enforcement.” The objective, he writes, is to ensure “proportionate punishment and clarity of law so that criminal sanctions remain a last resort.”
The recommendations align with India’s ‘Viksit Bharat@2047’ vision of a transparent, innovation-friendly fiscal ecosystem. But until enforcement shifts from suspicion to trust, the paper warns, India’s tax reform will remain “half-complete.”