NITI Aayog Unveils Paper on Decriminalising Tax Laws, Promoting Trust-Based Governance

Continuing its push for evidence-based and citizen-centric economic governance, NITI Aayog has released the second working paper under its NITI Tax Policy Working Paper Series–II, titled "Towards India's Tax Transformation: Decriminalisation and Trust-Based Governance." The paper marks a significant step in India's evolving tax reform journey, focusing on simplifying legal frameworks, modernising administration, and fostering a culture of mutual trust between taxpayers and the state.

This follows the earlier release in the series — "Enhancing Certainty, Transparency, and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India," which aimed to address tax ambiguity for global investors. Together, both papers underscore India's ambition to create a transparent, fair, and globally aligned tax ecosystem.

A Shift from Enforcement to Empowerment

Unveiling the paper, Shri B.V.R. Subrahmanyam, CEO of NITI Aayog, highlighted that India's tax reforms are entering a decisive phase of transformation—one grounded in simplification, modernisation, and trust.

"As India transitions from enforcement-driven compliance to trust-based governance, the focus must shift to proportionate, fair, and transparent enforcement mechanisms that empower taxpayers while protecting fiscal integrity," he stated.

He stressed that a trust-based tax regime represents a vital evolution for India's economy, balancing administrative efficiency with citizen confidence, and moving away from the legacy of punitive enforcement that often discouraged voluntary compliance.

Key Focus: Decriminalisation and Rationalisation

The working paper conducts an in-depth analysis of the criminal provisions under the Income-tax Act, 2025, assessing their necessity, proportionality, and coherence with India's current economic objectives. It points out that while the 2025 Act has eliminated many outdated and redundant offences, it still criminalises 35 types of actions or omissions across 13 provisions, a majority of which mandate imprisonment.

To align with the government's reform vision, the paper recommends:

• Decriminalising minor and procedural offences, such as delays or non-material compliance lapses.

• Restricting criminal sanctions to serious offences involving wilful tax evasion or fraud.

• Empowering judicial discretion to ensure punishment is proportionate to the intent and impact.

• Enhancing the role of civil and administrative penalties, focusing on corrective, not punitive, measures.

By advocating a principle-based framework, NITI Aayog seeks to rationalise penalties and establish a graded enforcement model that differentiates between inadvertent errors and deliberate evasion.

Strengthening Trust and Reducing Litigation

The report positions trust as the cornerstone of modern tax governance, arguing that voluntary compliance flourishes when taxpayers are treated as partners rather than adversaries. The CEO observed that rationalised and humane tax laws will not only reduce litigation and administrative burden but also boost investor confidence by offering a predictable policy environment.

"Simplified and proportionate tax enforcement is essential for enhancing business confidence and ensuring that India's fiscal policies reflect both fairness and global best practices," Mr. Subrahmanyam noted.

He further remarked that embedding trust at the policy level will allow enforcement agencies to optimise resources, focusing on high-impact cases rather than minor infractions.

Collaborative Approach to Reform

The release event featured senior representatives from the Central Board of Direct Taxes (CBDT), Central Board of Indirect Taxes and Customs (CBIC), Institute of Chartered Accountants of India (ICAI), and Department for Promotion of Industry and Internal Trade (DPIIT).

Prominent legal and tax experts from leading firms such as Vidhi Legal, Lakshmikumaran & Sridharan, Deloitte, and EY also participated, underscoring the consultative and multi-stakeholder approach behind NITI Aayog's policy initiatives.

The paper was developed in close coordination with the NITI Aayog Consultative Group on Tax Policy (CGTP), led by Dr. P. S. Puniha, Distinguished Fellow, NITI Aayog, and Shri Sanjeet Singh, Programme Director. Their contributions ensured that the study reflects both the jurisprudential depth and practical realities of India's tax landscape.

Building a High-Trust, Competitive Economy

The working paper concludes that India's tax transformation hinges on trust-based governance, where regulatory simplicity, proportionate enforcement, and digital integration collectively create a citizen-friendly compliance culture.

It envisions a future where India's tax system operates on predictability, fairness, and partnership, reducing friction between authorities and taxpayers, and reinforcing India's identity as a globally competitive, high-trust economy.

The full report, "Towards India's Tax Transformation: Decriminalisation and Trust-Based Governance", can be accessed on the NITI Aayog website: https://niti.gov.in/sites/default/files/2025-10/Report_Tax_Policy_Working_Paper_Series_II.pdf