The government plans to introduce an arbitration mechanism to reduce the burden of litigation on taxpayers and government officials. Sources told CNBC-TV18 that with dispute management a recurring theme in recent budgets, the upcoming 2025 budget may include a framework to make arbitration a preferred method for resolving tax disputes.

“The government is considering effective measures to manage tax disputes. As part of this mission, active discussions are underway to create a dedicated task force for an arbitration office 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 different levels of adjudication, sources added.

“Once instituted, the arbitration mechanism will also help India come closer to its global peers in terms of global best practices for handling tax disputes,” sources said.

Countries like Canada and Australia already have similar mechanisms, and the OECD advocates arbitration as the preferred method for resolving tax disputes.

Experts believe that such a decision could be a game-changer in the management of tax disputes.

“Arbitration or mediation is the right way forward to help the government and taxpayers escape the vicious cycle of pending disputes. The proposal is before the government and as soon as the outline of the budget is finalized, a decision will be taken,” sources said.

Alternative dispute resolution mechanisms are gaining importance in resolving tax disputes around the world and are an effective way forward.

Since 2020, there has been a notable increase in the adoption of such methods around the world. For example, in April 2024, the United States announced the creation of a new Alternative Dispute Resolution Program Management Office to improve its programs. The initiative aims to provide taxpayers with more efficient and accessible options for resolving disputes without resorting to traditional litigation.

In the UK, updates since 2020 allow 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 constructive and timely resolutions.

“Globally, the use of online and alternative dispute resolution mechanisms has grown significantly, particularly in 2024, thanks to technological advancements. AI and blockchain technologies improve the transparency and efficiency of these processes, making it easier for parties to engage in remote mediation or arbitration,” said Sandeep Bhalla, Partner at Dhruva Advisors.

He added: “In the international arena, arbitration is a widely encouraged method of resolving tax disputes, as it provides a structured and neutral approach to resolution. These developments reflect a global shift towards adopting alternatives such as arbitration as pragmatic solutions for managing taxation. resolve tax disputes effectively, ensuring clarity and fairness in tax administration while promoting international cooperation. Since then, India has traditionally relied on a litigation-based approach to resolving tax disputes, with a significant backlog of cases pending at various levels. This has often led to delays, increased compliance costs for taxpayers and administrative inefficiencies for tax authorities. Thus, India recognizes the global trend and benefits of alternatives such as arbitration or mediation. should be explored as measures to streamline tax dispute resolution.

Bhalla said, “In the past, the Vivad Se Vishwas (VSV) program in 2020 was a historic step towards an alternative resolution. The program aimed to reduce pending tax disputes by allowing taxpayers to resolve disputes by paying the principal amount of tax, with significant waivers on tax disputes. penalties and interest. Although VSV was successful in resolving a significant number of cases, this was a one-off measure and not a structural shift towards alternative dispute resolution processes.