Budget 2026: The urgent need to tackle long-pending and long drawn-out tax litigation

As the Union Budget 2026 draws closer, industry bodies and tax professionals are urging the government to shift part of its reform focus from tax rate rationalisation to the far more structural problem of long-pending direct tax litigation.

On the ground, businesses argue that predictability, timeliness and administrative efficiency in dispute resolution matter as much as headline tax rates—particularly for capital-intensive sectors such as manufacturing.The scale of the problem is substantial. As of April 1, 2025, nearly 5.4 lakh appeals were pending before the Commissioner of Income-tax (Appeals), involving disputed demands of about ₹18.16 lakh crore.

Protracted disputes result in working capital being locked up for years, management attention diverted from productive activity, and depressed valuations when Indian promoters seek foreign investment.Here are top five issues that Budget 2026 should tackle:1. Reduce pendency before CIT(A) and allow refund of taxes collected during pendency of appealIndustry body FICCI has flagged the mounting backlog at the CIT(A) level as a critical bottleneck in the dispute resolution framework.

The first appellate authority, meant to serve as an effective corrective forum, has instead become a point of prolonged delay.FICCI points out that pendency increased sharply after the faceless appeal regime was rolled out in 2021. While faceless appeals were introduced to eliminate physical interface and improve transparency, the absence of effective monitoring and the unfamiliarity of both officers and taxpayers with the technology have led to repeated notices, duplication of submissions and delayed disposals.

Even where taxpayers have filed detailed responses on the portal, they are often asked to resubmit information without clarity on what additional inputs are required.

Virtual hearings, when sought, are not granted liberally, and even when conducted, limitations in document presentation weaken effective representation.A key procedural gap, according to FICCI, is the absence of any time limit for assessing officers to submit remand reports called for by the CIT(A), coupled with ambiguity over whether jurisdictional officers or faceless units are responsible for such reports.

Meanwhile, parallel penalty proceedings are routinely initiated while quantum appeals remain pending, resulting in both quantum and penalty matters piling up at the first appellate stage.The industry body warns that the litigation lifecycle—already 12 to 15 years before Covid—has now lengthened by another five years. This not only delays revenue collection for the government but also forces companies to carry disputed tax demands as contingent liabilities, adversely impacting share valuations during fund-raising or stake sales.To address this, FICCI has recommended prioritised disposal of appeals involving high-pitched assessments, scrutiny cases, matters where detailed submissions have already been filed, issues covered by High Court or Supreme Court rulings, and appeals pending for over five years. It has also called for filling nearly 40% vacancies at the CIT(A) level and introducing a dual-track system, with fast-track disposal for simple, low-value cases and a detailed track for complex, high-value disputes, backed by differentiated timelines and targets.Tax professional Sandeep Bhalla, Partner at Dhruva Advisors, notes that appeals pending before the CIT(A) for more than two years cause serious hardship, particularly where disputed demands continue to remain outstanding. He argues that in such cases, taxpayers should not be compelled to wait indefinitely and should be allowed to approach the Income-tax Appellate Tribunal (ITAT) directly.Bhalla suggests a structured mechanism under which the assessee could approach the Range Head (Additional or Joint Commissioner), who would prepare a concise factual and legal factsheet.

This, along with the appeal records, could then be placed directly before the Tribunal for adjudication. Such a process, he believes, would help decongest the CIT(A) level while ensuring quicker resolution of long-pending disputes.At the same time, Bhalla emphasises that institutional accountability must be built into the system so that appeals remaining undisposed beyond two years without taxpayer fault are treated as a measurable performance failure rather than an administrative inevitability.2. Rationalise provisions to facilitate obtaining full stay of demand during pendency of appealsFICCI has also called for a rethink of the current framework governing stay of disputed tax demands. Although CBDT instructions provide that a stay may be granted on payment of 20% of the disputed demand, taxpayers are often required to make this payment even when the issue has been decided in their favour in earlier years.Compounding the problem, refunds for subsequent years are routinely adjusted by the Central Processing Centre (CPC) against demands that are formally stayed, because stay orders are not digitally integrated with CPC systems. According to FICCI, this defeats the very purpose of a stay and intensifies liquidity stress for businesses.To resolve this, the industry body has suggested creating a real-time interface enabling assessing officers to upload stay orders so that stayed demands are automatically excluded from refund adjustments.

It has also proposed allowing alternative forms of security—such as bank guarantees or indemnities—in appropriate cases instead of insisting on a cash pre-deposit, noting that international tax administrations adopt similar risk-based approaches without compromising revenue protection.3. Reducing administrative inconvenience and hardshipBhalla highlights that even after taxpayers succeed in appeals, delays in passing Orders Giving Effect (OGEs) often render appellate relief meaningless.

Refunds remain on paper for months, or even years, resulting in continued cash-flow strain.He recommends that OGEs be system-driven and mandatorily passed within three months, with interest payable for departmental delays made personally recoverable from the concerned assessing officer. Mandatory uploading of scrutiny and compliance reports on the tax portal, he argues, would enhance 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 that taxpayers should be allowed to file detailed reconciliations, that CPC orders rejecting rectification must give clear reasons, and that a virtual hearing should be provided wherever adjustments are proposed to be confirmed.4. Avoiding repetitive appeals by the RevenueDespite settled judicial precedents, the Revenue continues to litigate recurring issues, adding to the backlog.

Bhalla recommends that the CBDT issue authoritative position papers on key settled matters, particularly those affecting specific industries, and hold field officers accountable for filing appeals contrary to binding rulings.5. Strengthening the advance ruling mechanismBhalla also flags concerns around the functioning of 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 was meant to provide, especially for cross-border and high-value transactions, underscoring the need for corrective measures in Budget 2026.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 improve confidence on the ground. Budget 2026, therefore, has a chance to signal that tax certainty and administrative efficiency are central to the government’s growth strategy.