Finance Bill 2026 Decriminalises Tax Offences: Key Changes in IT Prosecution

The Finance Bill, 2026 introduces one of the most significant structural reforms in tax prosecution law since the enactment of the Income-tax Act itself. Through a coordinated set of amendments under:

• Clauses 17 to 25: amending prosecution provisions of the Income-tax Act, 1961, and
• Clauses 93 to 105: amending corresponding provisions under the Income-tax Act, 2025,

the Legislature has fundamentally rebalanced the approach to criminal liability in tax matters.

The amendments reflect a conscious policy shift away from excessive criminalisation, particularly for procedural, technical, or lower-value defaults, while continuing to retain criminal sanctions for serious and wilful tax evasion.

Legislative Philosophy Behind the Amendments

The reforms are guided by six clear principles:

1. Rigorous imprisonment replaced with simple imprisonment
2. Maximum imprisonment capped at two years (three years for repeat offences)
3. Graded punishment linked to the quantum of tax involved
4. Fine-only punishment where tax involved does not exceed ₹10 lakh
5. Complete decriminalisation of selected technical defaults
6. Harmonisation of prosecution provisions between the 1961 Act and the 2025 Act

This ensures predictability, proportionality, and uniformity in prosecution across both tax regimes.

Part I: Amendments under the Income-tax Act, 1961 (Clauses 17 to 25 Effective retrospectively from 1 March 2026)

1. Search and Investigation Related Offences

Section 275A: Contravention of Orders During Search

• Earlier: Rigorous imprisonment up to 2 years + fine
• Now: Simple imprisonment up to 2 years + fine

The offence continues to be punishable, but the severity of incarceration is moderated, recognising that not all contraventions during search are equally grave.

Section 275B: Failure to Facilitate Inspection of Books

• Earlier: Rigorous imprisonment up to 2 years + fine
• Now: Simple imprisonment up to 6 months or fine or both

This reflects that non-cooperation during inspection, while serious, should not attract disproportionately harsh punishment.

2. Failure to Deposit TDS/TCS and Tax Evasion (Sections 276B to 276D)

Sections 276B, 276BB, 276C, 276CC, 276CCC and 276D undergo major restructuring.

Key Changes:

• Mandatory minimum imprisonment removed
• Rigorous imprisonment eliminated
• Quantum-based grading introduced

New Punishment Framework:

Additionally:

• Failure to produce books under section 142(1) is fully decriminalised
• Criminal liability continues only for wilful non-compliance with special audit directions

3. False Statements, Falsification & Abetment

Sections 277, 277A, 278 and 278A (false verification, falsification of accounts, abetment of false returns and repeat offences) are amended to:

• Replace rigorous imprisonment with simple imprisonment
• Reduce maximum incarceration
• Introduce fine-only punishment for low-value cases

This ensures criminal prosecution is reserved for deliberate and material misconduct, not routine disputes.

4. Disclosure of Confidential Information by Public Servants: Section 280

• Earlier: Imprisonment up to 6 months + fine
• Now: Simple imprisonment up to 1 month or fine or both

This reflects proportional accountability while recognising the administrative nature of such lapses.

Part II: Amendments under the Income-tax Act, 2025 (Clauses 93 to 105 – Effective from 1 April 2026)

The 2025 Act adopts identical decriminalisation logic, ensuring continuity as India transitions to the new tax code.

1. Search, Inspection and Recovery Offences (Sections 473-475)

2. TDS and TCS Defaults (Sections 476 & 477)

Key reforms include:

• Complete decriminalisation of certain TDS defaults (e.g., lottery winnings, perquisites)
• Exclusion of wholly-in-kind income (online gaming / VDA) from prosecution
• Graded punishment for other cases based on ₹10 lakh / ₹50 lakh thresholds

3. Wilful Tax Evasion and Non-Filing of Returns (Sections 478-480)

• Rigorous imprisonment eliminated
• Maximum punishment reduced
• Fine-only treatment for lower-value defaults
• Search-related return filing offences substantially moderated

4. Procedural Defaults (Section 481)

• Failure to produce documents: fully decriminalised
• Failure to comply with special audit directions: reduced punishment

This marks a decisive shift away from criminalising procedural inefficiencies.

5. False Statements, Falsification & Abetment (Sections 482-484)

• Uniform grading of punishment
• Reduced imprisonment
• Fine-only punishment for minor cases

6. Repeat Offences and Public Servants (Sections 485 & 494)

• Repeat offences: maximum imprisonment reduced from 7 years to 3 years
• Public servants: imprisonment capped at 1 month

Effective Dates – Clarified

Practical Implications

✔ Reduced Criminal Exposure

Most tax defaults will now result in civil or monetary consequences, not incarceration.

✔ Faster Resolution & Lower Litigation

Fine-based regimes discourage prolonged prosecution and compounding disputes.

✔ Better Ease of Doing Business

Aligns India’s tax enforcement with global best practices.

✔ Strong Deterrence Retained

Serious, wilful, high-value tax evasion continues to attract imprisonment.

Conclusion

The prosecution reforms introduced through the Finance Bill, 2026 represent a structural transformation of India’s tax enforcement framework. By:

• eliminating excessive criminalisation,
• linking punishment to economic impact, and
• harmonising the old and new tax codes,

the amendments achieve a measured balance between deterrence and fairness, strengthening voluntary compliance while preserving the authority of the tax administration.

Related Posts:

Finance Bill, 2026: Union Budget 2026-27