Introduction 

India’s tax landscape is undergoing a significant transformation, driven by a series of reforms designed to streamline tax disputes and establish a more efficient resolution framework. With over INR 12 trillion (INR 11 lakh crore) currently tied up in disputes—a substantial sum representing more than 5% of India’s GDP—the imperative for reform is clear and pressing. This article examines India’s new tax resolution framework, focusing on critical initiatives such as the Faceless Assessment Scheme, Online Dispute Resolution (ODR), and the Vivad Se Vishwas Scheme, and how these measures are fundamentally reshaping tax dispute resolution in the country.

Understanding the Faceless Assessment Scheme

The Faceless Assessment Scheme marks a pivotal reform in India’s tax administration. Introduced in 2020, this scheme seeks to eliminate in person interaction in the tax assessment process, thereby reducing the potential for corruption, enhancing transparency, and improving overall efficiency.

The scheme employs advanced technologies, including data analytics, artificial intelligence (AI), and machine learning (ML), to automate the assessment of tax returns and the resolution of disputes. It operates on a system of randomized case allocation, wherein tax officers across the country are assigned cases electronically. This approach ensures anonymity and impartiality in decision-making, effectively mitigating the risk of harassment and reducing the backlog of unresolved disputes—a longstanding issue in India’s tax system.

Reports indicate that the government is planning further enhancements to the Faceless Assessment Scheme. These improvements are intended to simplify procedures and reduce the compliance burden on taxpayers, particularly small and medium-sized enterprises (SMEs), which often bear the brunt of complex tax regulations. Since its inception, the scheme has led to a significant reduction in the number of cases that escalate to litigation, contributing to a more predictable and taxpayer-friendly environment.

As of March 2024, the scheme had processed over 58,000 assessments, reducing the average resolution time from two years to just six months (also aided by the shortening of time limits for passing assessment orders). Additionally, the scheme has significantly decreased the necessity for taxpayers to physically appear before tax authorities, with over 85% of assessments now being completed digitally.

The Vivaad Se Vishwas Scheme: A Pathway to Dispute Resolution

The Vivad Se Vishwas Scheme is another critical initiative aimed at reducing the backlog of tax disputes in India. Launched in 2020, this scheme offered taxpayers an opportunity to settle their disputes by paying the prescribed disputed tax amount. This scheme was particularly beneficial for taxpayers seeking to avoid protracted litigation and resolve their issues expeditiously.

The scheme has been highly successful, with over 1.5 lakh cases resolved and more than INR 90,000 crore recovered by the government as of 2024. The Vivad Se Vishwas Scheme has played a crucial role in promoting voluntary compliance, thereby alleviating the burden on the judiciary and fostering a more cooperative relationship between taxpayers and tax authorities.

The scheme’s success rate exceeds 85%, with numerous corporations and individuals opting to settle disputes amicably rather than engaging in prolonged legal battles. Moreover, experts suggest that the success of this scheme has set the stage for future initiatives aimed at further reducing the tax litigation backlog, potentially unlocking additional revenues for the government.

Considering the success of the Vivad se Vishwas Scheme 2020, the 2024 budget enacted recently re-introduced the Vivad se Vishwas Scheme as the prior scheme had lapsed by October 2021.  The revised Scheme is further expected to reduce a significant amount of litigation.

Comparing Global Approaches to Tax Dispute Resolution

India’s new tax resolution framework is not an isolated development; it draws inspiration from international best practices. In the United States, for example, the Internal Revenue Service (IRS) has long utilized Alternative Dispute Resolution (ADR) mechanisms, such as mediation and arbitration, to resolve tax disputes. These mechanisms have been highly effective in reducing litigation and ensuring timely resolution.

Similarly, the United Kingdom and Australia have embraced technology-driven approaches to tax dispute resolution. The UK’s HM Revenue and Customs (HMRC) has integrated digital services into its dispute resolution processes, facilitating quicker resolutions and enhancing taxpayer engagement. Australia’s Australian Taxation Office (ATO) has adopted similar strategies, emphasizing early intervention and dispute prevention through online platforms.

India’s initiatives align with these global practices, positioning the country as a leader in innovative tax administration.

In the United States, ADR mechanisms have resolved over 80% of tax disputes without proceeding to litigation, while the integration of technology has led to a 30% reduction in case resolution time in the UK and Australia. The trend towards adopting such mechanisms in India is expected to grow, particularly as the country continues to focus on enhancing the efficiency of its tax administration through global best practices.

Challenges and Opportunities Ahead

While India’s new resolution framework offers significant benefits, several challenges remain. Ensuring widespread access to digital platforms, particularly in rural areas, is critical for the success of initiatives like ODR. Additionally, maintaining the transparency and fairness of faceless assessments is essential to prevent any erosion of taxpayer trust.

The government’s efforts to address these challenges include investing in digital infrastructure and launching digital literacy programs to ensure that all taxpayers, regardless of their location, can benefit from the new framework. Furthermore, the government is refining the appeal and review mechanisms within the Faceless Assessment Scheme to ensure that taxpayers have adequate recourse in the event of grievances.

India has invested over INR 5,000 crore in the Digital India initiative, aimed at expanding digital infrastructure and improving internet connectivity in rural areas. The success of these investments will be pivotal in the effective implementation of ODR and faceless assessments. These initiatives also present an opportunity for India to set a global benchmark in tax dispute resolution by integrating technology and policy reforms in a manner that balances efficiency with fairness.

Despite these challenges, the opportunities presented by the new framework are considerable. By reducing litigation, streamlining processes, and leveraging technology, India is poised to create a more predictable and stable tax environment that encourages greater investment and economic growth.  In addition, the new Income Tax Act which is expected to be tabled during Budget 2025 is expected to further simplify the existing Income Tax Act leading to a reduction in the amount of litigation going forward.

Conclusion

India’s new resolution framework for tax disputes represents a significant advancement in the country’s tax administration. By adopting technology-driven solutions such as the Faceless Assessment Scheme and Online Dispute Resolution, alongside policy initiatives like the Vivad Se Vishwas Scheme, India is establishing a more efficient, transparent, and taxpayer-friendly system. As these reforms continue to evolve, India is setting a global standard for innovative tax dispute resolution, creating a tax system that is more predictable and conducive to economic growth.

The Indian government projects that these reforms could potentially unlock an additional 1.5% of GDP over the next five years, underscoring the transformative impact of streamlining tax dispute resolution.

Share via