In a major push to make doing business easier in India, Finance Minister Nirmala Sitharaman on Sunday announced plans to rationalise penalty and prosecution. She said that multiplicity of proceedings are a hindrance to the ease of doing business and proposed to integrate assessment and penalty proceedings by way of a common order for both.
The government has proposed several changes to reduce tax disputes and make the system easier for taxpayers. Under the new proposal, taxpayers will not have to pay any interest on penalty amounts while their appeal is pending before the first appellate authority, no matter how the appeal is decided later.
Also, the advance payment required to file an appeal has been cut to 10% from 20%, and this will be calculated only on the actual tax amount, not on penalties or interest.
1 January 2026
Get the latest issue of Outlook Business
To further reduce court cases, Sitharaman proposed allowing taxpayers to update their income tax returns even after reassessment proceedings have started. In such cases, the taxpayer will have to pay an extra 10% tax over the applicable tax rate for that year. The tax officer will then rely only on this updated return while completing the assessment.
The government also plans to extend immunity from penalty and prosecution to cases of misreporting of income, which was earlier available only for underreporting. However, to get this immunity, the taxpayer will need to pay an additional tax equal to 100% of the tax due, apart from the regular tax and interest.
Several technical defaults will now be treated more lightly. Failures such as not getting accounts audited, not submitting transfer pricing reports, or delays in filing financial transaction statements will no longer attract penalties but will instead be charged as fixed fees.
The prosecution rules under the Income Tax Act are also being simplified. Certain offences, such as not producing books of accounts or issues related to TDS where payment is made in kind, will be decriminalised. Minor offences will attract only a fine, while serious cases will be graded based on the size of the offence. Even then, the maximum jail term has been reduced to two years, and courts will have the option to convert imprisonment into a fine.
Lastly, the Finance Minister said there is currently no penalty for not disclosing foreign movable assets worth less than ₹20 lakh. The government now plans to give immunity from prosecution for such cases, with retrospective effect from October 1, 2024, providing relief to small taxpayers.
Notably, during last year's Budget, Sitharaman had announced plans to bring Jan Vishwas Bill 2.0, which would decriminalise more than 100 outdated legal provisions and reduce unnecessary legal trouble for businesses by removing jail terms for minor offences and replacing them with financial penalties.
It also focused on simplifying tax-related processes by integrating assessment and penalty proceedings, cutting down on interest and prosecution in certain cases, and offering protection from retrospective action.
