The government has suggested a maximum of two years in jail, but the main opposition party believes this would merely encourage serious criminals to accept the lesser sentence rather than give up their secrets.
The Tory position became clear during the detailed report stage of the Regulation of Investigatory Powers (RIP) Bill.
The Bill is aimed at bringing up to date the powers of authorities to investigate and maintain surveillance on the vast volume data now moving across computers. It will lay down, for example, the legal rules that must be followed by the police and security services when they intercept e-mail and tap phones.
Under the proposals, an individual failing to provide a key to coded information, known as an encryption key, could be liable to a prison term of two years.
Paedophilia and drug trafficking
But Oliver Heald MP said that the sort of people who would be served with these notices to provide an encryption key would be those suspected of very serious crimes such as money laundering, paedophilia and drug trafficking.
"These are just the sort of people who would be prepared to accept the lesser offence and take the two year sentence rather than give up their secrets," he told MPs.
The RIP Bill has already come under fire from civil liberties groups. They are concerned at measures in the proposed legislation that would "reverse the burden of proof", meaning people unable to produce the key to encrypted information would be guilty of a crime by default.
Liberal Democrat Simon Hughes raised this issue in the chamber.
He said there was major concern in society at the measures being proposed. He told MPs that individual constituents had contacted him concerned about their potential criminal liability on the basis of their inability to provide an encryption key
ISP costs
Another major point of contention is over the potential cost of the proposed legislation to business, which some say will make people pay for the provision of the government's ability to intercept their e-mail.
The London Internet Exchange has calculated that the current proposals requiring the government to be given access to data will cost large internet service providers at least £250,000 a year.
It is feared some e-businesses might be forced abroad by the costs.
Home Office minister Charles Clarke addressed all of the major issues in turn.
He said that increasing the maximum jail term to 10 years would put an offence on a par with cruelty to children and added: "I have to say I'm not sure this is right."
He said forgetting a password was a "very reasonable thing to do" - and something "not unfamiliar to me" - so it was rare not to have contingency arrangements in place.
'No impossible burdens'
People could "relatively easily" state they had forgotten the password or key, volunteer how it was generated and what was normally done when it was lost.
"There are no impossible burdens here, the processes are very clear," Mr Clarke insisted.
He warned Conservatives that they would come to regret their opposition to the Bill.
If it was not law by October, when the Human Rights Act came into force, all security service operations involving electronic communications would have to be suspended as there would be no legal framework for such activity as required by the European Convention, he declared.
The Bill was given a Third Reading without a vote and now goes to the Lords.