Please find attached the NITI Aayog Working Report released in October 2025, titled “Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance”, which provides a detailed overview of the Government of India’s ongoing efforts to simplify the direct tax framework and promote a trust-oriented, business-friendly compliance environment. Historically, the Income-tax Act, 1961 imposed a wide range of criminal sanctions, with 54 offences originally criminalised across 15 provisions many of which pertained to relatively minor procedural or technical defaults. While recent reforms have rationalised this framework, 35 offences continue to remain across 13 sections under the Income-tax Act, 2025, each still attracting both imprisonment and monetary penalties.

The attached report of the Niti Aayog provides a focused assessment of the criminal provisions under the Income-tax Act, 2025 and recommends reforms aimed at reducing regulatory burden, curbing avoidable litigation, and strengthening voluntary compliance.

Key highlights relevant for businesses include:

1. Reduced Criminalisation of Routine Compliance Lapses - The proposed framework rationalises criminal penalties and removes prosecution for several procedural and technical defaults. With 13 offences already decriminalised under the Income Tax Act, 2025 and further actions recommended for conversion to civil penalties, routine delays and non-material errors will no longer attract disproportionate criminal consequences. This materially reduces uncertainty and exposure for businesses undertaking bona fide compliance efforts.

2. Shift from “Fear-Based” to “Trust-Based” Compliance - The government’s policy direction now favours voluntary compliance and simplification. Criminal sanctions previously applied even to minor lapses are proposed to be reserved only for cases of clear, intentional evasion. This transition fosters a cooperative compliance environment and reduces the apprehension of inadvertent defaults escalating into prosecution.

3. Clear Distinction Between Fraud and Genuine Errors - The Report draws a firmer distinction between deliberate evasion and bona fide mistakes. Earlier provisions that did not require proof of intent exposed taxpayers and senior management to prosecution for unintentional lapses. The recommended framework ensures that only conduct involving fraud, deceit, or deliberate misrepresentation warrants criminal action, shielding genuine taxpayers from undue criminal proceedings.

4.Greater Discretion and Proportionality in Penalties - A shift toward proportionate, non-custodial penalties is strongly advocated. Replacing mandatory imprisonment with judicial discretion ensures penalties are aligned with the gravity of the default and taxpayer conduct. Minor or first-time lapses would be addressed through civil mechanisms, thereby reducing reputational and operational risks for enterprises.

5.Enhanced Ease of Doing Business - Collectively, the reforms aim to strengthen the Ease of Doing Business environment by reducing legal friction, clarifying enforcement thresholds, and lowering litigation exposure. Businesses can redirect resources from procedural compliance burdens toward growth, investment, and strategic priorities, supported by a more stable and predictable tax administration aligned with global best practices.

The proposed tax transformation marks a major step toward a modern, simplified, and trust-driven tax ecosystem. It reduces compliance burdens, mitigates enforcement risks, and enables businesses to focus on core objectives without fear of unintended criminal exposure.

Click Here to Download-NITI Aayog Report on Tax Decriminalisation and Trust-Based Governance - October 2025