India's Tax Compliance Transformation: Analyzing the Shift from Disputes to Resolution
India's tax revenue system has undergone significant transformation in recent years, with the government implementing various measures to streamline compliance and reduce litigation. The latest data reveals a complex picture of progress and persistent challenges in realizing the nation's tax potential.
The Growing Mountain of Unrealized Tax Revenue
At the close of the 2024-25 fiscal year, India faced a staggering ₹38.4 trillion in unrealized tax revenue, representing funds caught in legal and administrative processes. This substantial amount marks a 30.5% increase from the previous year and reflects a nearly 200% growth since the introduction of the Direct Tax Vivad se Vishwas Scheme in 2020.
Tax revenues serve as the fundamental pillar supporting government finances, enabling critical public infrastructure development and welfare initiatives. When substantial portions remain unrealized due to disputes and procedural delays, it creates fiscal constraints that impact national development priorities.
The Compositional Shift in Tax Disputes
The fiscal year 2023 marked a significant turning point in India's tax dispute landscape. Following the government's implementation of voluntary settlement schemes, the proportion of 'tax not under dispute' rose dramatically from less than 20% in FY20 to over 50% by FY25.
This shift represents meaningful progress toward reducing pending income tax litigation, providing resolution pathways for both taxpayers and government authorities. However, the absolute amount of tax under dispute continues to remain elevated, increasing by 16.2% year-on-year in FY25 alone.
Contextualizing the Dispute Figures
To understand the scale of tax disputes, consider that the ₹2.5 trillion increase in disputed tax during FY25 represents approximately 6.6% of India's total gross tax collections of about ₹38 trillion for that fiscal year. This substantial amount highlights the ongoing challenge of tax realization despite policy interventions.
Experts point to the Vivad Se Vishwas Scheme as playing a pivotal role in dispute reduction. According to finance ministry data, the initial phase of this scheme settled nearly ₹1 trillion in disputed direct taxes across more than 130,000 cases, with a second scheme launched in 2024 to continue this momentum.
Corporate vs Income Tax Dispute Patterns
Within the disputed tax landscape, corporate taxes continue to dominate, accounting for 51% of total disputed amounts in FY25. This represents an increase from previous years, with corporate tax disputes rising above the 50% threshold since FY24.
Conversely, income tax disputes have shown relative decline, falling below 40% since FY23 and currently representing 37% of total disputed taxes. This divergence suggests different compliance challenges across taxpayer categories.
Expert Perspectives on Compliance Challenges
Aditi Goyal, partner in tax practice at Trilegal, notes that "faceless assessments and appeals have reduced jurisdictional bias and improved assessment quality to some extent, leading to fewer disputes." These technological interventions represent important steps toward more transparent and consistent tax administration.
However, experts remain cautious about the overall trend. Sandeep Bhalla, partner at Dhruva Advisors, observes that "while tax not under dispute has increased sharply, making disputed amounts appear smaller relatively, the absolute tax under dispute has not declined." This distinction between relative and absolute measures highlights the complexity of assessing progress.
Budget 2026: Further Compliance Easing Measures
The government's Budget 2026 announcement includes additional measures designed to simplify tax compliance. Key provisions under the New Income Tax Act, 2025, which takes effect from April, include:
- Simplified filing procedures
- Extended deadlines for submissions
- Reduced penalty structures
These initiatives aim to create a less adversarial and more predictable tax regime, addressing long-standing concerns about compliance complexity.
The Insolvency Factor in Tax Realization
Experts identify a steady increase in insolvency and bankruptcy cases as a significant factor hindering the state's ability to enforce and realize assessed taxes. Data from the Insolvency and Bankruptcy Board of India reveals a dramatic rise in insolvency initiations, growing from just 37 cases in FY17 to 733 cases in FY25.
This tenfold increase over the past decade creates additional complications for tax authorities seeking to recover dues from financially distressed entities, adding another layer of complexity to India's tax realization challenges.
As India continues its journey toward more efficient tax administration, the balance between dispute resolution and compliance enforcement remains delicate. The compositional shift toward reduced disputes represents progress, but the absolute growth in disputed amounts indicates that significant challenges persist in fully realizing India's tax revenue potential.
