A system upgrade led to a criminal tax notice. How Budget 2026 changes that
A routine system upgrade or staff reshuffle should not land a business in criminal trouble. Yet, under earlier tax rules, even genuine operational delays could trigger prosecution. Budget 2026 aims to fix this by easing penalties for procedural lapses.
For many taxpayers, even a small delay in filing documents or meeting compliance deadlines could earlier spiral into serious legal trouble. Minor procedural mistakes, often caused by operational or technical issues, sometimes triggered criminal proceedings, creating stress for individuals and businesses alike.
Budget 2026 is trying to change that approach. By simplifying penalties, decriminalising technical defaults and widening disclosure options, the government is moving towards a system that focuses more on correction than punishment.
IndiaToday.in spoke to tax experts Gaurav Makhijani, Tax Head at Makhijani Gera and Associates, and CA (Dr) Suresh Surana to understand how these changes could ease long-standing concerns for taxpayers.
EARLIER RULES BLURRED LINE BETWEEN MISTAKE AND MISCONDUCT
Under the earlier framework, the law often failed to clearly separate deliberate tax evasion from genuine operational difficulties. As a result, even unintentional lapses sometimes exposed taxpayers to criminal action.
Gaurav Makhijani shared a hypothetical example of a company that faced prosecution because it could not submit all its books of accounts on time due to an ERP migration and changes in finance personnel.
He explained, “A taxpayer was required to produce specified books of accounts and documents by a stipulated date pursuant to a notice issued by the Indian tax authorities. Owing to an ongoing ERP migration and changes in the responsible finance personnel, the company was unable to produce all the requested documents within the prescribed timeframe triggering criminal proceedings under the existing provisions. Under the proposed full decriminalisation, such instances would no longer attract criminal prosecution.”
He said that Budget 2026 represents a clear move away from a penalty-heavy enforcement system towards a more proportionate, fee-based and disclosure-friendly framework. He added, “Cases involving wilful failure to produce accounts and documents pursuant to a notice issued under section 268(1) are proposed to be fully decriminalised under section 481.”
HOW SMALL TAXPAYERS WERE HIT THE HARDEST
According to CA (Dr) Suresh Surana, the earlier provisions imposed strict penalties for audit and reporting delays, even when taxpayers had paid their dues and maintained proper records.
He said that under Section 446 of the Income Tax Act, 2025, failure to get accounts audited without reasonable cause could attract a penalty of up to 0.5% of turnover or Rs 1.5 lakh, whichever was lower. Section 447 imposed a fixed Rs 1 lakh penalty for not furnishing certain accountant reports, while Section 454 levied daily penalties for delays in filing statements of financial transactions.
Surana pointed out that small traders and professionals, who often depend on a single auditor, could face delays due to illness or workload pressures. Despite full tax compliance, short audit delays triggered penalty proceedings, personal hearings and added financial strain, increasing compliance stress and litigation.
FINANCE BILL 2026 REPLACES PENALTIES WITH GRADED FEES
To address these concerns, the Finance Bill 2026 proposes to replace several discretionary penalties with a graded fee structure from 1 April 2026.
Under the new system, penalties for failing to get accounts audited or for not furnishing accountant reports will be converted into fixed, graded fees based on the length of delay. Daily penalties for delays in filing financial transaction statements will be replaced by a mandatory fee, and an upper cap of Rs 1 lakh will be introduced for continued defaults after notice.
Surana explained that this shift from discretionary penalties to a structured fee mechanism is designed to bring more certainty and reduce unnecessary litigation for technical or procedural lapses.
A MOVE TOWARDS A MORE BALANCED COMPLIANCE SYSTEM
Tax experts say the reforms reflect an attempt to create a more balanced and predictable compliance environment. By separating procedural delays from wilful misconduct, the government aims to reduce fear among honest taxpayers while still keeping safeguards against serious violations.
In the long run, these changes could encourage voluntary compliance and lower the burden of disputes between taxpayers and authorities.
In other words, Budget 2026’s tax reforms signal a clear shift in tone—from strict punishment for every lapse to a more proportionate and practical approach. For individuals and small businesses in particular, the move promises less anxiety over minor delays and a system that recognises the difference between genuine mistakes and intentional wrongdoing.
For many taxpayers, even a small delay in filing documents or meeting compliance deadlines could earlier spiral into serious legal trouble. Minor procedural mistakes, often caused by operational or technical issues, sometimes triggered criminal proceedings, creating stress for individuals and businesses alike.
Budget 2026 is trying to change that approach. By simplifying penalties, decriminalising technical defaults and widening disclosure options, the government is moving towards a system that focuses more on correction than punishment.
IndiaToday.in spoke to tax experts Gaurav Makhijani, Tax Head at Makhijani Gera and Associates, and CA (Dr) Suresh Surana to understand how these changes could ease long-standing concerns for taxpayers.
EARLIER RULES BLURRED LINE BETWEEN MISTAKE AND MISCONDUCT
Under the earlier framework, the law often failed to clearly separate deliberate tax evasion from genuine operational difficulties. As a result, even unintentional lapses sometimes exposed taxpayers to criminal action.
Gaurav Makhijani shared a hypothetical example of a company that faced prosecution because it could not submit all its books of accounts on time due to an ERP migration and changes in finance personnel.
He explained, “A taxpayer was required to produce specified books of accounts and documents by a stipulated date pursuant to a notice issued by the Indian tax authorities. Owing to an ongoing ERP migration and changes in the responsible finance personnel, the company was unable to produce all the requested documents within the prescribed timeframe triggering criminal proceedings under the existing provisions. Under the proposed full decriminalisation, such instances would no longer attract criminal prosecution.”
He said that Budget 2026 represents a clear move away from a penalty-heavy enforcement system towards a more proportionate, fee-based and disclosure-friendly framework. He added, “Cases involving wilful failure to produce accounts and documents pursuant to a notice issued under section 268(1) are proposed to be fully decriminalised under section 481.”
HOW SMALL TAXPAYERS WERE HIT THE HARDEST
According to CA (Dr) Suresh Surana, the earlier provisions imposed strict penalties for audit and reporting delays, even when taxpayers had paid their dues and maintained proper records.
He said that under Section 446 of the Income Tax Act, 2025, failure to get accounts audited without reasonable cause could attract a penalty of up to 0.5% of turnover or Rs 1.5 lakh, whichever was lower. Section 447 imposed a fixed Rs 1 lakh penalty for not furnishing certain accountant reports, while Section 454 levied daily penalties for delays in filing statements of financial transactions.
Surana pointed out that small traders and professionals, who often depend on a single auditor, could face delays due to illness or workload pressures. Despite full tax compliance, short audit delays triggered penalty proceedings, personal hearings and added financial strain, increasing compliance stress and litigation.
FINANCE BILL 2026 REPLACES PENALTIES WITH GRADED FEES
To address these concerns, the Finance Bill 2026 proposes to replace several discretionary penalties with a graded fee structure from 1 April 2026.
Under the new system, penalties for failing to get accounts audited or for not furnishing accountant reports will be converted into fixed, graded fees based on the length of delay. Daily penalties for delays in filing financial transaction statements will be replaced by a mandatory fee, and an upper cap of Rs 1 lakh will be introduced for continued defaults after notice.
Surana explained that this shift from discretionary penalties to a structured fee mechanism is designed to bring more certainty and reduce unnecessary litigation for technical or procedural lapses.
A MOVE TOWARDS A MORE BALANCED COMPLIANCE SYSTEM
Tax experts say the reforms reflect an attempt to create a more balanced and predictable compliance environment. By separating procedural delays from wilful misconduct, the government aims to reduce fear among honest taxpayers while still keeping safeguards against serious violations.
In the long run, these changes could encourage voluntary compliance and lower the burden of disputes between taxpayers and authorities.
In other words, Budget 2026’s tax reforms signal a clear shift in tone—from strict punishment for every lapse to a more proportionate and practical approach. For individuals and small businesses in particular, the move promises less anxiety over minor delays and a system that recognises the difference between genuine mistakes and intentional wrongdoing.