The government is considering introducing an arbitration mechanism to reduce the legal burden on taxpayers and government officials. Sources told CNBC-TV18 that since litigation is a recurring theme in recent budgets, the upcoming Budget 2025 may include a framework to make arbitration a preferred method of resolving tax disputes.

“The government is considering effective process management measures for tax disputes. Under this mandate, active discussions are underway to create a special team dedicated to an arbitration tribunal as an alternative dispute resolution mechanism to resolve tax disputes,” sources said.

The move is aimed at facilitating ease of doing business and reducing the backlog of pending cases at various assessment levels, sources added.

“Once set up, the arbitration mechanism will also help India scale up with its global peers in having global best practices in handling tax disputes,” sources said.

Countries such as 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 dealing with tax disputes.

“Arbitration or mediation is the right way forward to help both the government and taxpayers escape the vicious cycle of ongoing disputes. The proposal is with the government and as soon as the budget outlines are ready, 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 noticeable increase in the adoption of such methods worldwide. For example, in April 2024, the United States announced the creation of a new Alternative Dispute Resolution Program to improve its programs. The initiative aims to offer taxpayers more efficient and accessible options to resolve disputes without resorting to traditional litigation.

In the UK, updates since 2020 have enabled 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 prompt and constructive solutions.

“Globally, the use of online and alternative dispute resolution mechanisms has grown significantly, especially in 2024, driven by technological advances. AI and blockchain technologies are improving the transparency and efficiency of these processes, making it easier for parties to engage in mediation or arbitration remotely , says Sandeep Bhalla, partner at Dhruva Advisors.

He further said, “on the international stage, arbitration is a widely encouraged method of resolving tax disputes, as it offers a structured and neutral approach to adjudication. This development reflects a global shift towards embracing alternatives such as arbitration as pragmatic solutions to dealing with taxes .disputes effectively, ensuring clarity and fairness in tax administration while promoting international cooperation.Then, India has traditionally relied on a process-intensive approach to resolve tax disputes, with a significant backlog of cases at various levels of adjudication, from appellate courts to the Supreme Court, realizing the global trend and the benefits of alternatives such as arbitration or mediation are what India should explore as measures to streamline tax dispute resolution.”

Bhalla said, “Earlier, the Vivad Se Vishwas Scheme (VSV) 2020 was a milestone step towards alternative resolution. The scheme aimed to reduce ongoing tax disputes by allowing taxpayers to settle disputes by paying the principal amount of tax, with significant exemptions on penalties and interest. Also if VSV demonstrated success in resolving a significant number of cases, it was a one-off measure and not a structural change towards alternative dispute resolution processes.”