Budget 2025 Expectations: Will there be steps to tackle growing income tax dispute backlog?

Budget 2025 Expectations: With just a few days left for Union Budget 2025, taxpayers and policymakers are keenly awaiting Finance Minister Nirmala Sitharaman’s announcements on Saturday, February 1. While the spotlight often falls on tax reliefs for individuals, an equally critical concern this year is addressing the mounting backlog of income tax disputes—an issue that has plagued the country's tax ecosystem for decades. India’s tax dispute backlog continues to grow, with unresolved cases clogging various levels of the judicial system. According to data from the Parliamentary Standing Committee and industry analyses:

• Over 5.02 lakh cases remain pending at the Income Tax Appellate Tribunal (ITAT) and other forums
• Disputes involving a staggering Rs 14.2 lakh crore are under litigation
• At the High Court level, nearly 29,763 cases are stuck, amounting to Rs 3.3 lakh crore
• Transfer pricing cases alone take, on average, more than 111 months to resolve

Expectations for Budget 2025

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Experts and stakeholders are calling for a more comprehensive strategy to address the dispute backlog. Potential measures could include:

- Simplified tax laws: A committee formed in July 2024 has been reviewing thousands of suggestions to modernise the Income Tax Act of 1961. Its recommendations are expected to make compliance easier by removing outdated provisions.

- Customs Amnesty Scheme: Following the success of previous GST amnesty schemes, there’s demand for a similar initiative to resolve customs-related disputes.

- Technology-driven resolution: Leveraging AI and data analytics could help automate case resolutions, identify potential disputes early, and reduce delays.

- Litigation caps: Imposing stricter limits on appeal rights for both taxpayers and authorities to prevent frivolous litigation and expedite resolution.

What was introduced in Budget 2024?

In the previous budget, the government introduced significant reforms under the Direct Tax Vivad Se Vishwas Scheme 2024, allowing taxpayers to settle disputes by paying reduced penalties. Recent updates to the scheme have clarified its application to appeals filed within permissible deadlines, ensuring a fair resolution process for taxpayers.

Additionally, rationalisation of capital gains tax structures—such as reducing holding periods for long-term assets—was initiated, with calls for further refinements to address anomalies like those impacting shares sold via IPOs. As the tax-to-GDP ratio steadily improves, reaching 11.8 per cent in FY24, the government faces increasing pressure to create a taxpayer-friendly environment while boosting revenue collections.

Lessons from past amnesty schemes

India has experimented with tax amnesty programs before, like the Voluntary Disclosure of Income Scheme (VDIS) in 1997 and the Vivad Se Vishwas Scheme in 2020. While these initiatives have helped bring undeclared income into the system, they’ve often faced criticism for allegedly encouraging non-compliance.

In Budget 2024, the government introduced the Direct Tax Vivad Se Vishwas 2.0 scheme to speed up dispute resolution. However, procedural hurdles meant it didn’t gain as much traction as hoped. Recent updates have made the scheme more flexible, recognising appeals filed within permissible deadlines.