Closing Customs disputes sans ‘stigma’: Understanding amendment to Customs section 28(6)

The Union Budget 2026 signals a continued shift towards trust-based regulation and faster dispute closure across indirect tax administration. Amongst the reforms proposed in the Finance Bill, 2026 (‘Finance Bill’), proposal for amendment to Section 28(6) of the Customs Act, 1962 (‘Customs Act’) is a notable change. 
 

The Taxation Laws (Amendment) Act, 2006 introduced amendments to Section 28 of the Customs Act, allowing assesses to make voluntary payment of duty even in cases involving fraud or mis-statement. This amendment was intended to give trade a means to settle disputes at an early stage[1]. In this backdrop, the proposed amendment to sub-section (6) of Section 28, marks a significant welcome. While preserving the existing quantum and timelines under the voluntary payment route, the amendment recharacterizes “penalty” paid under Section 28(5) as a “charge for non-payment of duty”, thereby removing the long-standing stigma associated with the term. 
 

Overview of Section 28 and the stigmatic connotation associated with ‘penalty’.
 

Sub-sections (5) and (6) of Section 28 were introduced to provide an efficient closure mechanism for assessees who choose not to contest a demand raised under sub-section (4) – which is issued for cases involving alleged suppression, collusion or misstatement. Thus, show cause notices issued under Section 28(4) usually contain detailed charges for imposition of penalties. 
 

Currently, where an importer or exporter voluntarily pays the duty with applicable interest and a reduced ‘penalty’ equivalent to fifteen per cent of the duty within thirty days-the proceedings are deemed to be concluded. This framework is intended to reduce litigation, conserve administrative resources, and incentivize assessees to resolve disputes at an early stage without entering into prolonged adjudication or appellate proceedings.
 

Despite the facilitative intent behind sub-sections (5) and (6), the current legal framework continues to characterize the additional amount paid by the assessee as a ‘penalty’, even in cases of voluntary and non-litigated compliance. The core problem stems from the punitive label attached to what is essentially a facilitative payment. Even in cases of bona fide importers/ exporters who choose to close the proceedings in order to buy peace, the fact that such closure requires payment of ‘penalty’, especially when demand notices contain allegations based on wilful evasion or fraud-  triggers adverse consequences for compliant businesses. This is more specifically an obstacle for those assessees who intend to maintain their Authorized Economic Operator (‘AEO’) status, or for those applying for DGFT license for import of restricted items or a license for undertaking manufacturing operations in warehouse in terms of Section 65 of the Customs Act (MOOWR license)- as these require specific declarations that the assessee has not been penalized in the past for non-compliances under Customs Act. 
 

Additionally, accounting standards require penalties to be disclosed separately in financial statements, often as extraordinary expenses, which can distort profit figures and invite scrutiny from auditors and investors. Reputational damage follows, as stakeholders may view such entries as indicators of non-compliance or mismanagement, eroding trust in otherwise diligent enterprises. Moreover, this stigma deters trade from opting for voluntary compliance, pushing more cases towards protracted litigation that burdens both the customs administration and businesses. 
 

The Proposed Amendment to Section 28(6)
 

The Finance Bill proposes to amend sub-section (6) of Section 28 to provide that the penalty paid under sub-section (5), upon determination under sub-section (6), shall be deemed to be a “charge for non-payment of duty”. The amendment does not alter the amount payable, the timelines for payment, or the procedure for concluding the proceedings. Instead, it clarifies and re-characterizes the legal nature of the amount paid in voluntary compliance cases to be a ‘charge’, as opposed to being a ‘penalty’.
 

By deeming the amount to be a ‘charge’ for non-payment of duty, the amendment removes its punitive character and aligns it with the compensatory nature of voluntary compliance. The amount ceases to be treated as a penalty, thereby mitigating the collateral consequences associated with penalties in accounting, audit and regulatory contexts. This progressive approach aligns seamlessly with several other trade-facilitation initiatives undertaken in recent years such as the AEO programme, MOOWR Scheme or DGFT schemes. The issues faced by the assessees in applying for such schemes due to the stigma of ‘penalty’ have now been minimized and hence, the businesses that have opted for voluntary compliance will no longer face adverse scrutiny on this ground.
 

While this amendment is a welcome stride towards facilitation, few concerns still remain. While the amendment would re-characterize the payment as ‘charge’ instead of being a ‘penalty’, an express clarification in the provision stating that closure under Section 28(6) should not imply any admission of guilt– would promote and encourage genuine self-correction. Such clarification is needed as even after voluntary payment/ closure under Section 28(6), criminal prosecution under Section 135, 135A and 140 can be initiated against an assessee.  
 

The show cause notices issued to assessees under Section 117 or 124 of the Customs Act – continue to carry the stigma of ‘penalty’, even though the said sections prescribe penalties for not so grave offences. A similar amendment for such sections would further facilitate trade in closing the matters and facilitate ease of doing business. The industry should take this up with the Board for introduction of similar amendments.
 

Conclusion
 

The proposed amendment to Section 28(6) of the Customs Act represents a measured and pragmatic reform that aligns legal form with policy intent. By re-characterizing the amount paid in voluntary compliance cases, as a ‘charge’ rather than a ‘penalty’, the law acknowledges cooperative behavior of assessees and reduces unintended collateral consequences. The reform is expected to enhance trust between trade and customs administration, promote voluntary compliance and support the broader objective for improving ease of doing business, particularly for assessees operating under AEO, MOOWR and DGFT-linked compliance frameworks.

[The authors are Senior Associate, Associate Partner and Partner respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

[1] The Taxation Laws (Amendment) Bill, 2005