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Context

NITI Aayog released the working paper under the NITI Tax Policy titled “Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance.” 

What is the Core Problem Identified in the Report?

The report identifies the "persistent over-criminalisation" within the direct tax framework as a major obstacle to building a trust-based system.

Legacy Issues

Old Income Tax Act, 1961, criminalised 54 different actions, many of which were minor procedural or technical lapses. While the new Income-tax Act, 2025, is an improvement (decriminalising some offences), it still criminalises 35 actions.

Mandatory Minimum Imprisonment

For 25 of the 35 offences, the Act prescribes mandatory minimum jail terms, removing judicial discretion to impose lesser sentences based on the specific circumstances of a case.

Reverse Burden of Proof

The Act presumes guilt by assuming a culpable mental state, placing the burden of proving innocence on the accused—a deviation from standard criminal law principles.

Report proposes that Criminal law should only be used when:

• It Protects a Fundamental Societal Value: Action must threaten core values like public safety, national security, or fiscal integrity.
• It Addresses a Clear, Direct, and Substantial Harm: Harm must be real and measurable, not hypothetical or a minor inconvenience.
• It is the Only Effective Solution: Criminal law should be a last resort. Civil or administrative penalties must be preferred if they can achieve the same goal.
• The Punishment is Proportionate: Severity of the punishment must match the seriousness of the violation, distinguishing between honest error and deliberate fraud.
• The Law is Clear and Precise: Offences must be clearly defined to avoid ambiguity and arbitrary enforcement.

What are the Key Recommendations of the Report?

Complete Decriminalisation

Of the 35 criminal offences identified, 12 should be fully decriminalized. These are primarily administrative and technical defaults that pose no real risk to fiscal security. They should be handled through civil or monetary penalties alone.

Selective Criminalisation

17 offences should be partially decriminalized. Criminal liability should be retained only for fraudulent or malafide intent. This would distinguish genuine, good-faith procedural lapses from deliberate fraud.

Retention for Serious Misconduct

6 core offences involving deliberate, high-value, and injurious misconduct (such as orchestrated tax evasion or fabrication of evidence) should remain criminal, but with proportionate punishments.

Removal of Mandatory Minimum Imprisonment

Mandatory minimum jail terms should be removed for most offences. This would restore judicial discretion, allowing courts to decide punishments based on the individual circumstances and culpability in each case.

Omission of Reverse Burden of Proof

Presumption of a "culpable mental state" should be removed. The burden of proof should be restored to the prosecution, which must prove willful or fraudulent intent beyond a reasonable doubt, in line with standard criminal law principles.

Drafting Reform and Periodic Review

Offence definitions should be simplified for clarity, and a mechanism should be established for the regular review of criminal provisions to eliminate obsolete or redundant offences over time.

Adopt International Best Practices

The report highlights that mature tax systems in countries like the United States, United Kingdom, and Germany reserve criminal prosecution for only the most egregious violations.

• They establish clear legal distinctions between criminal intent (fraud) and lesser culpability (recklessness or negligence).
• Minor infractions like delays in filing or inadvertent errors are handled through administrative procedures involving monetary penalties and interest, focusing on revenue recovery rather than punishment.

Conclusion

NITI Aayog's working paper provides a clear and actionable roadmap for aligning India's direct tax regime with global best practices and the national vision of a modern, fair, and trust-based governance system, to create a tax architecture that is not only efficient but also equitable and citizen-centric.

Source: PIB