The fundamental design problem for the coming decade is the divergence between the growth of the taxpayer base and the volume of third-party financial data.
Government of India has undertaken a fundamental shift in governance in the recent years Trust-based administration is grounded on the latest research on human behavior to improve outcomes of public finance by making tax systems and spending rules more transparent, predictable, and easier to comply. It raises voluntary compliance and lowers enforcement costs. When government engages citizens, explains trade-offs clearly, and apply rules, then mutual trust reduces leakages, improves targeting, and makes public money deliver more value
This transition is visible in landmark legislative and policy changes such as the Jan Vishwas Act 2023 and decriminalization of numerous procedural offences under the Income tax Act, 2025. The core principles and values of trust-based governance are explicitly articulated in the NITI Aayog’s October 2025 working paper, “Towards India’s Tax Transformation: Decriminalization and Trust Based Governance”. The NITI Aayog’s research showcases that criminal sanctions are needed only for willful and egregious tax evasions, whereas the law and procedures ought to treat routine errors as correctable administrative matters rather than punishable offences.
Union Budget 2026 further operationalizes this logic by framing India’s direct taxes, GST, and customs administration around a “trust first” regime. This approach prioritizes nudging taxpayers to rectify mistakes early, rather than relying on punitive measures, after the tax evasion facts and actions are detected by peeling layers of financial transactions by the tax administrators In the next decade, tax administration is likely to become the primary arena where this governance viewpoint is tested at a scale to provide crucial evidence of policy design and implementation processes to make trust based citizen-centric authority the core value and practice of governance.
In August 2020, Hon. Prime Minister launched the fundamental and dramatic change in tax governance through the “Faceless Direct Tax Administration” to make the tax system, “Seamless, Painless, and Faceless”. He stated that an atmosphere is being created, where primacy is being given to duty to execute voluntary tax compliance. The better voluntary compliance is to be achieved not because of force and fear of punishment, but because of an understanding of the holistic approach that is being adopted. He observed that these reforms are not in piecemeal, but are aimed at delivering better results with a comprehensive perspective of human behaviour. PM praised the role of honest taxpayers in nation building and said that making the lives of such taxpayers easy is the responsibility of the government, “When the life of an honest taxpayer of the country becomes easy, he moves forward and develops, then the country also develops and leaps forward.” For decades, the standard instinct in tax policy was to view non-compliance as an enforcement problem, solvable only through the traditional triad of audits, penalties, and legal deterrence. However, a decade of field experimentation across various nations that include Britain, Denmark, Belgium, Costa Rica, and India suggest a more nuanced ground reality. The emerging consensus is that a significant share of non-compliance is not driven by malice or an intent to evade. Instead, it is frequently the result of inertia, procrastination, confusion regarding complex processes, or simple inattention. Distinguishing those “who will not comply” from those “who have not yet complied” has become one of the most consequential design questions in modern tax administration.
The faceless assessment scheme is the clearest articulation of a move to transactional trust. The tax assessment is no longer be made by the local officers Their neighborhood networks of information as well as the connections with business and professional elite in their area of influence counts for nothing. How many visits taxpayer or his consultant make to the tax office would be of no consequence. The reams of account papers that the chartered accountant asked the taxpayer to prepare, and which he filed in the tax office is no longer needed. Their role is replaced by the data of the taxpayers’ financial transactions that the tax department now routinely and periodically collects from the other regulatory authorities. For instance, any immoveable property transaction undertaken in the last year with a value of Rs 30 lakhs or more, aggregate annual cash deposits or withdrawals from savings bank account or term deposit accounts of more than Rs 10 lakhs, expenses in foreign currency of Rs 10 lakhs or more are reported to the income tax department by the specified financial institutions and land record agencies like registrars or sub-registrars of the municipalities. This data is increasingly visible to the taxpayer as he sits down to fill his annual income tax return. It is a clear and blunt reminder to taxpayers that the income tax department knows the significant financial transactions of the last year and the tax return ought to consider all such fund flows.
Enhanced voluntary compliance is at the core of the new scheme. Empirical studies from other countries suggest a causative relationship between the potential capacity and capability of the tax administration to reach the trail of financial transactions that has been left behind by a uniquely identifiable taxable entity and the voluntary compliance by the taxpayers In a way, a higher degree of compliance is induced and coaxed by a visible knowledge with the taxpayer that his financial transactions have left behind footprints that are visible to the tax official and no discretion vests either with the taxpayer or the tax official to ignore or camouflage the fund flows that are reflected in these transactions. An illustration of this is the Form 26AS that is visible to the taxpayer before he files his annual tax return. The scope of the Form 26AS has been slowly and significantly broadened. Evidence from global trials confirms that the most effective interventions are those that reduce “friction” rather than increasing the severity of warnings. In the UK, for instance, trials by His Majesty’s Revenue and Customs(HMRC) and the Behavioral Insights Team (BIT) demonstrated that simple changes to the wording of tax reminder letters, emphasizing social norms and public-service framing, generated millions of pounds in additional revenue. A Danish audit experiment revealed that tax evasion is primarily a failure of the information environment rather than a lack of morality, as compliance nears perfection when third-party reporting is present and visible. Consequently, where self-reporting remains necessary, leakage is better addressed through targeted administrative interventions than through moral appeals.
Similarly, in Belgium, tax authorities found that redesigning correspondence to provide clearer deadlines and explicit, simplified next steps reduced late filing more reliably than escalating the language of penalties. The Central Board of Direct Taxes (CBDT) initiative in collaboration with NITI Aayog and BIT Team of UK leverages advanced data analytics and international information exchanges to drive voluntary tax compliance through proactive, penalty-free alerts. This non-intrusive approach prompted 24,678 taxpayers to disclose Rs 29,208 crore in offshore assets and Rs 1,089.88 crore in foreign income during its initial campaign. Furthermore, it led 3.6 million individuals to revise mismatched returns in a single fiscal year, while successfully guiding domestic taxpayers to withdraw ineligible deductions and wrongful donation claims.
Read individually, these are country-specific results. Read together, they converge on a proposition that appears to hold regardless of jurisdiction, income level, or tax type: friction, and not willingness, is usually the binding constraint on compliance. The interventions that succeed are those that make compliance easier to execute or harder to defer. Wherever information architecture can substitute for persuasion, it consistently outperforms any message a government could write.
India’s recent administrative performance provides a robust case study of this paradigm shift. The last ten years have seen an unprecedented expansion in the formal tax base. These are strong results by any comparative standard, and they explain why India’s tax administration has increasingly become a reference point for other developing economies:
Income Tax Filings: The number of income tax returns filed nationally rose from approximately 3.62 crore in FY 2013-14 to roughly 8.79 crore in FY 2025-26, more than doubling in a decade.
Revenue Growth: The direct tax collections grew by an estimated 302 per cent over the same period, with net collections reaching nearly Rs 23.41 lakh crore in the FY 2025-26.
Taxpayer Base: The overall taxpayer base expanded by approximately 143 per cent.
Administrative Efficiency: The average time taken to issue a refund to the taxpayer dropped from 93 days in 2013 to approximately 17 days by 2025, facilitated by a function of end-to-end efiling, pre-filled returns and faceless assessment.
These achievements validate the “trust-based” approach. Yet, they also highlight a new challenge. The more consequential number for what comes next is not the growth in filings; it is the growth in the underlying data volume the tax administration must now process to keep that growth honest. The fundamental design problem for the coming decade is the divergence between the growth of the taxpayer base and the volume of third-party financial data. India’s digital payments network, for instance, scaled from roughly 2 crore UPI transactions in FY 2016-17 to over 24,000 crore transactions annually by FY 2025-26. This trend is not plausibly reversible: continuing formalization of the economy, the expansion of GST invoicing, and the ongoing build-out of the Annual Information Statement all point toward an information environment that will keep growing several multiples faster than the taxpayer base itself, for the foreseeable future. The Income Tax Department’s Project Insight now tracks several billion financial transactions annually, cross-referencing bank records, securities trades, and GST invoices against declared income. To sustain the trust-based regime, we must move beyond campaign-based nudging toward adaptive behavioral design.
*Dr Pushpinder Puniha is Chairperson of Consultative Group on Tax Policy of NITI Aayog. Sanjeet Singh is Program Director, Finance and Economics of NITI Aayog.
