Government Plans to introduce Arbitration Mechanism to Resolve Tax Disputes in Budget 2025

The Indian government is actively considering the implementation of an arbitration mechanism to resolve tax disputes in an effort to reduce the litigation burden on both taxpayers and authorities. According to sources, the initiative aligns with the government’s continuous focus on litigation management, which has been a recurring matter in recent Union budgets. The proposed framework could be introduced in Budget 2025.

“Proactive discussions are going on to create a dedicated arbitration desk under a special team to facilitate alternative dispute resolution (ADR) mechanisms for tax disputes,” sources said.

This proposal aims to:

• Reduce tax adjudication delays to improve corporate efficiency.
• Clear the backlog of ongoing cases at different appellate levels.
• Align India with global best practices in tax dispute resolution.

Countries such as Canada and Australia already use similar arbitration procedures, and the OECD has long promoted arbitration as a preferred method of resolving tax disputes.

ADR mechanisms have gained popularity in tax dispute resolution globally.

For example:

• In April 2024, the United States established an Alternative Dispute Resolution Program Management Office to provide effective, litigation-free solutions.
• In 2020, the United Kingdom broadened its mediation and arbitration options, allowing taxpayers to seek alternative dispute resolution at any step of the process.
• Artificial intelligence (AI) and blockchain technology have made alternative dispute resolution more transparent and accessible, allowing for virtual mediation and arbitration around the world.

“India must embrace arbitration and mediation in order to break the cycle of tax disputes. It would greatly increase dispute settlement efficiency and tax administration fairness,” according to an expert.

New Milestone in India’s Tax System

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 implementation of arbitration in Budget 2025 may mark an evolutionary shift. Experts believe it has the ability to revolutionize the game by decreasing compliance requirements, promoting a cooperative tax environment, and aligning India with global best practices.

With tax litigation management emerging as a key priority area, the government’s proposed ADR mechanism might pave the way for a more equitable, speedier, and efficient resolution of tax disputes, enhancing investor confidence and the ease of doing business in India.