“Government is considering effective litigation management measures for tax disputes. Under this mission, active discussions are underway to create a special team dedicated to an arbitration desk as an alternative dispute resolution mechanism to settle tax disputes,” sources said.
The move is aimed at improving ease of doing business and reducing the backlog of pending cases at various adjudication levels, sources added.
“Once instituted, the arbitration mechanism will also help India scale up with its global peers in terms of having global best practices to deal with tax disputes,” sources said.
Countries like Canada and Australia already have similar mechanisms in place, and the OECD advocates arbitration as a preferred method for resolving tax disputes.
Experts believe such a move could be a game-changer for managing tax litigation.
“Arbitration or mediation is the right way forward to help both the government and taxpayers escape the vicious cycle of pending disputes. The proposal is before the government, and as soon as budget contours are finalised, a decision will be taken,” sources said.
Alternative dispute resolution mechanisms are gaining prominence in tax dispute resolution worldwide as a successful way forward.
Since 2020, there has been a notable increase in the adoption of such methods worldwide. For instance, in April 2024, the United States announced the formation of a new Alternative Dispute Resolution Program Management Office to enhance its programs. The initiative aims to offer taxpayers more efficient and accessible options for resolving disputes without resorting to traditional litigation.
In the UK, updates since 2020 have allowed taxpayers to request alternative dispute resolution mechanisms at any stage of a tax dispute. These mechanisms, including mediation, facilitation, and expert opinion, have been expanded to ensure timely and constructive resolutions.
“Globally, the use of online and alternative dispute resolution mechanisms has grown substantially, especially in 2024, driven by advancements in technology. AI and blockchain technologies are enhancing the transparency and efficiency of these processes, making it easier for parties to engage in mediation or arbitration remotely,” said Sandeep Bhalla, Partner at Dhruva Advisors.
He further said, “on the international stage, arbitration is a widely encouraged method for resolving tax disputes, as it offers a structured and neutral approach to adjudication. These developments reflect a global shift towards embracing alternatives such as arbitration as pragmatic solutions to manage tax disputes efficiently, ensuring clarity and fairness in tax administration while fostering international cooperation. Since, India has traditionally relied on a litigation-intensive approach to resolve tax disputes, with a significant backlog of cases pending at various levels of adjudication, from appellate tribunals to the Supreme Court. This situation has often resulted in delays, increased compliance costs for taxpayers, and administrative inefficiencies for the tax authorities. Thus, recognizing the global trend and benefits of alternatives such as arbitration or mediation is what India should explore as measures to streamline tax dispute resolution.”
Bhalla said, “In the past, Vivad Se Vishwas Scheme (VSV) in 2020 was a landmark step toward alternative resolution. The scheme aimed to reduce pending tax litigation by allowing taxpayers to settle disputes by paying the principal tax amount, with significant waivers on penalties and interest. While VSV demonstrated success in clearing a substantial number of cases, it was a one-time measure and not a structural shift toward alternative dispute resolution processes.”
