Industry Demands Focus on Tax Dispute Resolution in Upcoming Budget
As the Union Budget 2026 approaches, industry groups and tax experts are calling for a major shift in government priorities. They want less emphasis on adjusting tax rates and more on fixing India's massive backlog of direct tax cases. Businesses say predictable and efficient dispute resolution matters just as much as headline tax rates, especially for capital-heavy sectors like manufacturing.
The Scale of the Problem is Huge
The numbers tell a stark story. As of April 1, 2025, nearly 540,000 appeals were waiting before the Commissioner of Income-tax (Appeals). These involve disputed tax demands of about ₹18.16 lakh crore. Long-running disputes tie up working capital for years. They divert management attention from productive work and hurt company valuations when Indian promoters seek foreign investment.
Five Key Issues Budget 2026 Must Address
Industry leaders have identified five critical areas for reform in the upcoming budget.
1. Cut Pendency at CIT(A) and Allow Refunds During Appeals
The Federation of Indian Chambers of Commerce and Industry (FICCI) calls the growing backlog at the CIT(A) level a critical bottleneck. This first appellate authority, meant to correct errors quickly, has become a source of long delays.
FICCI notes pendency jumped sharply after the faceless appeal system started in 2021. While designed to remove physical contact and boost transparency, the new system lacks effective monitoring. Both officers and taxpayers struggle with the technology, leading to repeated notices, duplicate submissions, and slow decisions.
Taxpayers often must resubmit information without clear guidance on what is needed. Virtual hearings are hard to get, and even when held, limits on document presentation weaken their case.
A major procedural gap, FICCI says, is the lack of any deadline for assessing officers to submit remand reports requested by the CIT(A). It is also unclear whether jurisdictional officers or faceless units are responsible for these reports. Meanwhile, penalty proceedings often start while quantum appeals are still pending, creating a pile-up at the first appeal stage.
The industry body warns the litigation lifecycle, already 12 to 15 years before Covid, has now stretched by another five years. This delays government revenue collection and forces companies to list disputed tax demands as contingent liabilities, hurting share valuations during fundraising or stake sales.
To fix this, FICCI recommends prioritizing appeals involving high-pitched assessments, scrutiny cases, matters with detailed submissions already filed, issues covered by High Court or Supreme Court rulings, and appeals pending over five years. It also calls for filling nearly 40% of vacancies at the CIT(A) level and introducing a dual-track system. Fast-track disposal would handle simple, low-value cases, while a detailed track would manage complex, high-value disputes, each with clear timelines and targets.
Tax professional Sandeep Bhalla, Partner at Dhruva Advisors, notes appeals pending before the CIT(A) for more than two years cause serious hardship, especially when disputed demands remain outstanding. He argues taxpayers in such cases should not wait indefinitely and should be allowed to approach the Income-tax Appellate Tribunal (ITAT) directly.
Bhalla suggests a structured mechanism where the assessee could approach the Range Head (Additional or Joint Commissioner). The Range Head would prepare a concise factual and legal factsheet. This, along with appeal records, could then go directly to the Tribunal for a decision. He believes this would help clear the CIT(A) backlog and ensure quicker resolution of long-pending disputes.
At the same time, Bhalla stresses the need for institutional accountability. Appeals remaining undisposed beyond two years without taxpayer fault should be treated as a measurable performance failure, not an administrative inevitability.
2. Rationalize Provisions for Full Stay of Demand During Appeals
FICCI also wants a rethink of the current framework for staying disputed tax demands. Although CBDT instructions say a stay may be granted on payment of 20% of the disputed demand, taxpayers often must pay this even when the issue was decided in their favor in earlier years.
Making things worse, refunds for later years are routinely adjusted by the Central Processing Centre (CPC) against demands that are formally stayed. This happens because stay orders are not digitally integrated with CPC systems. FICCI says this defeats the purpose of a stay and increases liquidity stress for businesses.
To resolve this, the industry body suggests creating a real-time interface allowing assessing officers to upload stay orders. This would automatically exclude stayed demands from refund adjustments. It also proposes allowing alternative security forms like bank guarantees or indemnities in appropriate cases, instead of insisting on a cash pre-deposit. It notes international tax administrations use similar risk-based approaches without compromising revenue protection.
3. Reduce Administrative Inconvenience and Hardship
Bhalla highlights that even after taxpayers win appeals, delays in passing Orders Giving Effect (OGEs) often make the relief meaningless. Refunds stay on paper for months or years, causing continued cash-flow strain.
He recommends making OGEs system-driven and mandatory within three months. Interest for departmental delays should be personally recoverable from the concerned assessing officer. Mandatory uploading of scrutiny and compliance reports on the tax portal would boost transparency and accountability.
Bhalla also points to the largely mechanical nature of rectifications under section 154 against CPC adjustments under section 143(1). He suggests taxpayers should be allowed to file detailed reconciliations. CPC orders rejecting rectification must give clear reasons, and a virtual hearing should be provided wherever adjustments are proposed to be confirmed.
4. Avoid Repetitive Appeals by the Revenue
Despite settled judicial precedents, the Revenue continues to litigate recurring issues, adding to the backlog. Bhalla recommends the CBDT issue authoritative position papers on key settled matters, especially those affecting specific industries. Field officers should be held accountable for filing appeals contrary to binding rulings.
5. Strengthen the Advance Ruling Mechanism
Bhalla also flags concerns about the Board for Advance Rulings, which replaced the Authority for Advance Rulings in 2021. More than four years on, the mechanism has failed to deliver the certainty it promised, particularly for cross-border and high-value transactions. This underscores the need for corrective measures in Budget 2026.
Credibility is Key for Investment
As India positions itself as a preferred investment destination, the credibility of its tax dispute resolution system will be closely watched by both domestic and global investors. Meaningful reforms that reduce pendency, ensure timely refunds, and curb avoidable litigation could significantly boost confidence on the ground. Budget 2026 has a chance to signal that tax certainty and administrative efficiency are central to the government's growth strategy.
