The Indian government is actively exploring the introduction of an arbitration mechanism to address tax disputes, a move aimed at easing the litigation burden on both taxpayers and officials. Sources revealed that the initiative aligns with the government’s ongoing focus on litigation management, a recurring theme in recent Union Budgets. The proposed framework may be unveiled in Budget 2025.
A Step Toward Efficient Tax Dispute Resolution
“Active discussions are underway to create a dedicated arbitration desk under a special team to facilitate alternative dispute resolution (ADR) mechanisms for tax disputes,” sources said. The proposal seeks to:
- Enhance the ease of doing business by reducing delays in tax adjudication.
- Clear the backlog of pending cases at various appellate levels.
- Align India with global best practices for tax dispute resolution.
Countries like Canada and Australia already employ similar arbitration systems, while the OECD has long advocated arbitration as a preferred method for resolving tax disputes.
Learning from Global Practices
Globally, ADR mechanisms have gained traction in tax dispute resolution. For instance:
- In April 2024, the United States launched an Alternative Dispute Resolution Program Management Office to offer efficient, litigation-free solutions.
- The UK expanded mediation and arbitration options in 2020, allowing taxpayers to seek ADR at any stage of the dispute process.
- Technological advancements like AI and blockchain have made ADR more transparent and accessible, enabling virtual mediation and arbitration worldwide.
“India must embrace arbitration and mediation to escape the cycle of tax disputes. It would significantly improve the efficiency of dispute resolution and enhance fairness in tax administration,” an expert noted.
A Milestone for India’s Tax Ecosystem
India’s tax system has traditionally relied on litigation-heavy processes, resulting in a significant backlog at appellate tribunals and courts, increased compliance costs, and administrative inefficiencies. Past initiatives, like the Vivad Se Vishwas Scheme (VSV) in 2020, provided temporary relief by allowing taxpayers to settle disputes with waivers on penalties and interest. However, VSV was a one-time measure and not a long-term structural solution.
The introduction of arbitration in Budget 2025 could mark a transformational shift. Experts view it as a potential game-changer, reducing compliance burdens, fostering a cooperative tax environment, and aligning India with global practices.
With tax litigation management emerging as a key focus area, the government’s proposed ADR mechanism could pave the way for a fairer, faster, and more efficient resolution of tax disputes, boosting investor confidence and ease of doing business in India.
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