New Delhi, Feb 2: The Union Budget 2026–27, presented in Parliament on Sunday by Finance Minister Nirmala Sitharaman, has proposed a series of direct tax reforms aimed at rationalising penalty and prosecution provisions, reducing litigation, and improving ease of doing business.
A key proposal seeks to integrate assessment and penalty proceedings through a single common order to avoid multiplicity of proceedings. Under this reform, taxpayers will not be liable to pay interest on penalty amounts for the period during which an appeal is pending before the first appellate authority, irrespective of the appeal’s outcome. The Budget also proposes to reduce the pre-payment requirement for filing appeals from 20 per cent to 10 per cent, calculated only on the core tax demand.
To further curb litigation, the Finance Minister proposed allowing taxpayers to update their income tax returns even after reassessment proceedings have been initiated. Such updated returns would be subject to an additional tax of 10 per cent over and above the applicable rate for the relevant year, and the assessing officer would rely solely on this updated return during proceedings.
The Budget also expands the existing framework that grants immunity from penalty and prosecution in cases of underreporting of income. This immunity is proposed to be extended to cases of misreporting as well, provided the taxpayer pays an additional income tax equal to 100 per cent of the tax amount, over and above the tax and interest due.
Several penalties for technical defaults are proposed to be softened. Penalties for failures such as not getting accounts audited, non-furnishing of transfer pricing audit reports, and default in furnishing statements of financial transactions are proposed to be converted into fees.
On the prosecution front, the Finance Minister announced rationalisation of provisions under the Income Tax Act while maintaining deterrence for serious offences. Non-production of books of account and documents, as well as cases involving Tax Deducted at Source (TDS) payments made in kind, are proposed to be decriminalised. Minor offences will attract only fines, while remaining prosecutions will be graded based on the quantum of offence. These will involve only simple imprisonment, with the maximum term reduced to two years, and courts will have the power to convert even such imprisonment into fines.
In a significant relief measure, the Budget proposes immunity from prosecution for non-disclosure of non-immovable foreign assets with an aggregate value of less than ₹20 lakh. This immunity will apply retrospectively from October 1, 2024.
The proposed reforms are aimed at simplifying tax administration, reducing compliance burden, and fostering a more taxpayer-friendly regime while retaining safeguards against serious tax offences.
