NITI Aayog Pushes for a Trust-Based Tax System: A Blueprint for Decriminalising India’s Income Tax Law

India’s taxation landscape may soon see a tectonic shift — one that replaces fear with fairness and moves from punishment to partnership. In a major step towards reshaping how India collects and governs taxes, NITI Aayog has released its latest working paper titled “Towards India’s Tax Transformation: Decriminalisation and Trust-Based Governance.”

This report, part of the NITI Tax Policy Working Paper Series–II, marks a pivotal moment in the government’s ongoing mission to modernise and humanise India’s tax administration. It follows the first paper in the series, “Enhancing Certainty, Transparency, and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India.”

But this time, the focus is sharper — on decriminalising the Income Tax system and building a governance model based on trust, transparency, and proportionality.

A Call for “Trust Over Threats”

Releasing the paper, B.V.R. Subrahmanyam, CEO of NITI Aayog, set the tone for what could be a defining reform in India’s fiscal evolution.

“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 said.

Subrahmanyam’s words encapsulate a larger vision — an India where paying taxes is not driven by fear of punishment but by a shared belief in responsibility and accountability.

What the Paper Says

The working paper takes a hard look at the criminal provisions under the Income-tax Act, 2025, examining whether they are necessary, fair, and in line with India’s larger reform goals.

The study finds that even after recent updates, the law still criminalises 35 actions and omissions across 13 provisions, many of which carry mandatory imprisonment.

To address this, the report proposes a principle-based framework for reform — one that aims to:

• Decriminalise minor and procedural non-compliances,

• Rationalise punishments to ensure they are proportionate,

• Strengthen judicial discretion in enforcement, and

• Reserve criminal penalties strictly for deliberate fraud or wilful evasion.

In essence, the paper calls for a “calibrated decriminalisation roadmap” — shifting the system from a fear-based structure to a fair and predictable one.

Tax laws, by their very nature, influence both economic behaviour and investor confidence. India’s old enforcement-heavy model often led to litigation, distrust, and compliance fatigue.

By contrast, a trust-based approach can yield far-reaching benefits — reduced litigation, faster resolution of cases, and higher voluntary compliance.

Subrahmanyam highlighted that reforms like these could also enhance India’s appeal to global investors, by making the tax environment more predictable and aligned with international best practices.

“Simplification and trust go hand in hand. When the system is fair and transparent, compliance becomes natural,” he noted.

The release of the paper was not just a bureaucratic event — it was a collaborative milestone. Representatives from CBDT, CBIC, ICAI, DPIIT, and leading tax advisory firms like Vidhi Legal, Lakshmikumaran & Sridharan, Deloitte, and EY participated in the launch discussions.

The working group behind the paper was coordinated by the NITI Aayog Consultative Group on Tax Policy (CGTP), led by Dr. P. S. Puniha, Distinguished Fellow, NITI Aayog, and Sanjeet Singh, Programme Director, NITI Aayog.

A Shift in Tax Philosophy

The heart of this reform lies not just in tweaking laws but in reimagining the relationship between the government and the taxpayer.

For decades, tax enforcement in India has been perceived as punitive — often intimidating even for honest taxpayers. But the new direction being proposed envisions “governance through trust”, where voluntary compliance is encouraged and administrative efficiency is enhanced.

The paper argues that embedding trust at the core of tax governance will help:

• Strengthen voluntary compliance,

• Optimise the use of enforcement resources, and

• Build a high-trust economy aligned with India’s global growth ambitions.

The Road Ahead

The government’s ongoing tax reforms — from faceless assessments to rationalised rates and digital filing systems — have already laid the groundwork for a more transparent ecosystem.

Now, this NITI Aayog paper could serve as a policy compass for the next phase of transformation — one that could reshape the very foundation of how India approaches taxation.

By reducing criminalisation and prioritising fairness, the report paves the way for an era where compliance is a matter of confidence, not compulsion.

As India moves closer to becoming a $5 trillion economy, such initiatives will be critical in ensuring that growth is not just fast but also fair — built on a foundation of trust, simplicity, and shared responsibility.