Union Budget 2026-27: Tax Reforms Aim to Ease Compliance and Reduce Litigation

Union Finance Minister Nirmala Sitharaman presented the Union Budget 2026-27 in Parliament on Sunday, unveiling a series of direct tax reforms aimed at simplifying compliance, rationalizing penalties, and reducing litigation for taxpayers.

In a bid to make the tax system more taxpayer-friendly, the Finance Minister proposed to integrate assessment and penalty proceedings through a single order, thereby avoiding multiple, overlapping proceedings. Under the new framework, taxpayers will not be liable to pay interest on penalty amounts during the period of appeal before the first appellate authority, regardless of the outcome. The pre-payment requirement for appeals has also been reduced from 20 percent to 10 percent of the core tax demand.

The Budget also allows taxpayers to update their income tax returns even after reassessment proceedings have been initiated, by paying an additional 10 percent tax over the applicable rate for the relevant year. The assessing officer will then use this updated return for all further proceedings, a move aimed at minimizing litigation and resolving disputes efficiently.

Currently, a framework exists granting immunity from penalty and prosecution in cases of underreporting. The Finance Minister announced that this immunity will now also extend to misreporting, though taxpayers will be required to pay 100 percent of the tax due as additional income tax, over and above the tax and interest already payable.

Certain technical penalties, such as those for failure to get accounts audited, non-filing of transfer pricing audit reports, and default in furnishing statements of financial transactions, are set to be converted into fees, further easing the compliance burden for minor procedural lapses.

The Budget also proposes a rationalization of the prosecution framework under the Income Tax Act. Minor offences such as non-production of books of accounts and documents or failure to make TDS payments in kind will be decriminalized, attracting fines instead of imprisonment. For remaining offenses, prosecution will be graded based on the severity of the violation, with maximum imprisonment limited to two years, and courts empowered to convert even these sentences into fines.

In another significant move, the Finance Minister announced retrospective immunity from prosecution for non-disclosure of non-immovable foreign assets valued below ₹20 lakh, effective from 1 October 2024.

Experts say these reforms reflect a broader effort by the government to make the tax system more transparent, efficient, and dispute-free, while maintaining deterrence for serious offences. Taxpayers can expect a more streamlined compliance environment, with opportunities to rectify errors and reduce litigation risk.

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