Budget 2026 Must Fix Harsh Penalties and Faceless Appeals in India’s New Tax Law
Income Tax Act 2025 Brings 120% Penalty and Jail Risk for Defaults
Experts Call for Fairer Appeals, Simplified Rules, and Stronger Taxpayer Protection
By Our Legal Reporter
New Delhi: January 07, 2026:
India’s Income Tax Act, 2025, set to take effect from April 1, 2026, represents the most significant overhaul of the country’s direct tax system in decades. While the government aims to create a principle-based, predictable, and self-contained tax code, concerns have emerged over harsh penalties, faceless appeals, and risks of criminal prosecution. With Budget 2026 around the corner, tax experts, industry bodies, and policy analysts are urging reforms to ensure the new law does not burden honest taxpayers.
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Key Features of the Income Tax Act, 2025
- 120% Penalty: Defaults in tax payments can attract penalties up to 120% of the tax due.
- Jail Risk: Serious violations may lead to imprisonment, raising fears of misuse.
- Faceless Appeals: Appeals will be handled digitally, without physical hearings, to reduce corruption and delays.
- Self-Contained Code: The Act replaces the Income Tax Act, 1961, aiming for clarity and predictability.
- Effective Date: Comes into force on April 1, 2026.
Concerns Raised by Experts
- Excessive Penalties:
- A 120% penalty is seen as disproportionate, especially for small businesses and salaried taxpayers.
- Critics argue it could discourage voluntary compliance.
- Faceless Appeals Challenges:
- While faceless appeals reduce corruption, taxpayers complain of lack of personal hearings.
- The Times of India reported that over 3 lakh appeals were pending as of 2024, and faceless systems often delay resolution.
- Risk of Criminalization:
- Linking tax defaults to jail terms may create fear among genuine taxpayers.
- Experts suggest focusing on civil penalties rather than criminal prosecution.
- Administrative Discipline:
- The success of the Act depends on disciplined administration, not just drafting laws.
Suggestions for Budget 2026
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- Reduce Penalty Rates: Cap penalties at 50–75% instead of 120%.
- Hybrid Appeals System: Allow taxpayers the option of video or in-person hearings.
- Taxpayer Charter: Strengthen rights of taxpayers, ensuring fair treatment.
- Simplify Compliance: Reduce paperwork and make digital filing more user-friendly.
- Dispute Resolution: Introduce fast-track mechanisms for small disputes.
- Training for Officers: Ensure tax officials are trained to handle faceless appeals fairly.
Comparative Global Practices
- United States: Penalties are capped at 25% of unpaid tax, far lower than India’s proposed 120%.
- UK: Focuses on interest-based penalties rather than criminal prosecution.
- Singapore: Encourages voluntary disclosure with reduced penalties.
India’s system appears harsher compared to global standards, raising concerns about competitiveness and ease of doing business.
Industry Reactions
- Business Chambers: Industry bodies like CII and FICCI have urged the government to balance enforcement with ease of compliance.
- Tax Professionals: Chartered accountants warn that faceless appeals may lead to “justice without hearing.”
- Startups: Fear that harsh penalties could discourage entrepreneurship.
Conclusion
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The Income Tax Act, 2025 is a bold attempt to modernize India’s tax system, but its success depends on Budget 2026 reforms. Policymakers must ensure penalties are fair, appeals are accessible, and compliance is simplified. A tax system should encourage honesty, not create fear.
Budget 2026 is an opportunity to fix loopholes, reduce litigation, and build trust between taxpayers and the government. If done right, India can achieve both robust revenue collection and taxpayer confidence.
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