INTRODUCTION

Mediation is defined by Centre for Effective Dispute Resolution (CEDR) as “a flexible process conducted confidentially in which a neutral person actively assists the parties in working towards a negotiated agreement of a dispute or difference, with the parties in ultimate control of the decision to settle and the terms of resolution.”1 Hence, mediation can be understood as a voluntary and confidential process which is nothing but an assisted negotiation. Unlike various other forms of dispute resolution like litigation and arbitration where third party adjudicates the matter, in mediation the parties themselves come up with options that meet the needs of both parties to come to an amicable settlement. Since the parties have come up with their own solutions, there will be faster resolution of disputes and compliance to the mediated settlement would generally be higher. The legal maxim „justice delayed is justice denied?2 will apply to the Indian Judiciary with great propriety when it comes to tax disputes in the country. Over the years, it is clear that India is highly accustomed with using the traditional adversarial system for resolution of tax issues. Few decades ago, this approach was appropriate for the Indian scenario. However, with globalization and growth of the economy in India, we have witnessed a sharp increase in the number of tax-payers which in turn lead to increase in tax disputes in the country. Numerous tax disputes are currently pending before the Indian courts as a result of the traditional approach to litigation, which has a number of drawbacks to it mainly with respect of causing delays, cumbersome procedural requirements, and enormous expenses. It is often said that “an ounce of Mediation is worth a pound of Arbitration and a ton of Litigation”3 Tax mediation which has been introduced under various jurisdictions in world like Australia, UK, Netherlands, etc. has positively contributed to resolving tax disputes and reducing the numerous pending cases. This paper analyses the need for mediation as an alternative to existing tax dispute resolution mechanism in India. This paper is divided in Five parts. PartI covers the role of mediation at present. Part-II analyses in-depth the existing tax dispute resolution mechanism in India. Part-III and Part-IV discussed the relevance of Tax mediation in general. Finally, Part-V discuses tax mediation in the Indian context in comparison to UK.
1 What is Mediation?, CEDR, https://www.cedr.com/whatismediation/
2 Bhavsar Dhwani Dharmeshkumar, ADR in Taxation in India, 8 LEGAL DESIRE INT?L J ON LAW 33, https://legaldesire.com/wp-content/uploads/2021/12/ADR-in-Taxation-in-India.pdf
3 Mediation: How To Resolve Issues Without Wasting Time and Money, CENTRE FOR MEDIATION AND CONCILIATION (CMC) (2018), http://centre4mediation.com/mediation-how-to-resolve-issues-without-wastingtime-and-money/

Mediation in India

In India, mediation is not a new concept. Mediation has been part of original dispute resolution mechanism in Indian from the ancient times. However, mediation lost its prominence in our country with the development of the adjudicatory system and the legal profession due to the fact that its enforcement is questionable, as there was no legal backing. 4 Despite this in India today, it is not that mediation is not prevalent at all. As of now, informal mediation has been used in many communities across the country to resolve disputes, mostly pertaining to the family, such as divorce and property disputes. Additionally, there are numerous legislations, including the Commercial Courts Act, Family Courts Act, Consumer Protection Act, and Companies Act, which have made mediation mandatory. Even Indian courts now acknowledge mediation as a valuable method of resolving disputes, and judges have directed parties to resort to mediation whenever they see the matter appropriate to be settled by way of mediation. Further, India has expressed its support for mediation as a legitimate form of dispute resolution mechanism by signing the Singapore Convention on Mediation in 2019. However, if we look at the current legal position of mediation in India, the problem is, till date we do not have a specific legislation which deals with mediation in India and which could lend legal recognition to mediated settlements. The Mediation Bill of 2021 is still pending before the parliament.
4 Gavin Lightman and Felicity Cullen, Mediation in Revenue Cases, 9 GITC REVIEW, http://taxbar.com/wpcontent/uploads/2016/01/Mediation_in_Revenue_Cases_FC.pdf

Existing Tax dispute resolution Mechanism in India

In India, the Income Tax Act, 1961 („IT Act?) provides for a five-tier legal system to resolve conflicts with respect to income tax between the taxpayer and the revenue department. Filing tax affairs are done through a self-assessment process by the taxpayer, whereby the taxpayers decide how much tax is to be paid by them for a financial year on their own and based on their assessment, they file returns which are then examined by the relevant Assessing Officer („AO?) within one to two years. 5 Upon dissatisfaction of either party, they can escalate the matter before the Commissioner of Income Tax (Appeals) („CIT(A)?). CIT(A) ordinarily takes about three to four years to dispose of a case after giving a fair hearing to both the parties. Next appeal can be filed by an aggrieved party before the Income-tax Appellate Tribunal („ITAT?) which takes around two to three years to adjudicate the matter.6 If either party is still not satisfied with the ITAT?s orders, they can raise an appeal only on the substantial question of law before the High Court with jurisdiction and subsequently the Supreme Court. HC takes on an average around three to four years while SC takes five to eight years to resolve tax disputes before them.7 Ultimately, it would somewhere be between 12 and 20 years for a dispute to be disposed of when escalated all the way up to the Supreme Court level.8 This clearly indicates that the traditional method of litigation takes quite a long time to resolve tax disputes in the country. Further, the pandemic in recent times has also contributed significantly to causing inordinate delay when it comes to disposal of tax appeals. From this, it is evident that the existing litigation process in our country i.e. appeal procedure is cumbersome and causes a lot of complications and delays. In India, the ITAT hears appeals against nearly 85% of CIT(A) orders. However, the revenue department’s success rate has been less than 30% and the rates have only been falling.9 In India, there are currently over 6.8 lakhs disputed direct and indirect tax related cases which are pending before various judicial and quasi-judicial bodies like the CIT(A), ITAT, HC and SC.10 The country’s growing number of tax-related disputes has led to a situation where sizable sums of money i.e., more than 12.3 lakhs crores as of 2018-19 is trapped in the ongoing litigation. Additionally, according to the Comptroller and Auditor General, 99% of the demand would be difficult to recover.11 This resulted in a circumstance where the requirement for ADR mechanisms to resolve tax disputes in our country arose. The Ministry of Finance in the recent times have understood that mounting tax consume huge resources of both the taxpayers and the government and resolving tax matters at the earliest will not only help the revenue department earn timely revenue but will also help in overall economic growth of the country. As a result, the government has undertaken various alternate dispute resolution („ADR?) mechanisms to reduce the number of tax litigation which are pending before the Indian courts. One such initiative is the creation of a quasi-judicial body, the Authority of Advance Ruling (AAR) which functions as an independent third-party adjudicatory body. An AAR is generally expected to resolve disputes within 6 months, but because of several administrative shortcomings, AAR’s effectiveness has largely remained on paper and has not really aided the tax system. AAR?s usually took anywhere between 6 months to 18 months to resolve disputes before it.12 The Income Tax Settlement Commission (ITSC) was set up under the IT Act as an alternative to avoid long drawn litigation but the scope of ITSC was limited to matters pending before the AO only. However, the ITSC ceased to operate from February 2021.13 Furthermore, the government came up with the Vivad se Vishwas Act, 2020 under which the parties could settle their tax dispute for a limited period of time without any additional amount like interest and penalties. 14 The government time and again have come up with various ADR mechanisms like the Dispute Resolution Panel, faceless mechanism, setting up of Dispute Resolution Committee etc.15 Even such ADR mechanisms like the ITSC, AAR which were introduced with the intention to facilitate speedy disposal of tax disputes have not proven to be beneficial in speedy disposal of cases in comparison to the conventional litigation process. It is therefore clear that the reach and effectiveness of India’s existing ADR forums for resolving tax disputes are restricted.
11 CBDT launches “faceless appeals” to dispose of Rs 5.6 lakh crore locked in tax disputes, THE TIMES OF INDIA, September 26, 2020, https://timesofindia.indiatimes.com/business/india-business/cbdt-launches-facelessappeals-to-dispose-of-rs-5-6-lakh-crore-locked-in-tax-disputes/articleshow/78315463.cms
12 Prachi Bhardwaj, Advance tax ruling system| Detailed report on what the Supreme Court said, SCC BLOG (2020), https://www.scconline.com/blog/post/2020/09/14/advance-tax-ruling-system-detailed-report-on-whatthe-supreme-court-said/
13 Leonora Meyercord, Avoiding State Bankruptcy: Mediation as an Alternative to Resolving State Tax Disputes, 29 REV. LITIG. 925 (2010).
14 MINISTRY OF FINANCE, ANNUAL REPORT 2021-22, https://dea.gov.in/sites/default/files/Annual%20Report%20%28English%29.pdf
15 Id.

Tax Mediation as an Alternative

Mediation is an informal process which the tax authorities may use as an alternate form of dispute resolution mechanism. Through mediation, the parties would be able to reach a mutually amicable settlement, which will benefit both the parties thereby creating a situation which is win-win for both the parties as opposed to the usual adjudicatory method where there is high likelihood that the case would be in favour of either the taxpayer or the revenue department thereby creating a win-lose situation. From this we can say that mediation as a dispute resolution mechanism is ideal as allows for flexible outcomes which are favorable to the parties.16 The flexibility of mediation will allow tax authorities to recover money which is curtail during the ongoing financial crisis as result of covid-19 pandemic. Further, With time and increasing inflation, the market value of money reduces. This means that market value of one lakhs in 2001 would be higher in comparison to its market value in 2021. So even if the tax authority recovers money from a tax dispute after years of litigation its will be very insignificant considering the fact reduction in market value due to inflation. Hence, it is necessary for the tax authorities to resolve tax matters at the earliest. Additionally, when it comes to tax issues, mediation is not the end of the process. Mediation can be introduced in the form of pre-litigation mediation which enables the parties to discuss their differences and attempt to come to a resolution before filing a suit in the courts. If the parties feel that the mediation process is ineffective for them, then they are still free to go to end mediation process and go to courts. Tax payers and tax authorities are interested parties to any tax disputes. They are parties who genuinely want to resolve the present dispute at the earliest. Litigation from the point of view of the tax payers are very expense which involves significant lawyer fees considering that they have to engage lawyers to represent them in courts and the tax payers would have to spend their time because they must appear in court whenever the matter arises. Additionally, the fact that tax payers have a legal suit pending might affect them psychologically as well. All of this would have an adverse impact on their personal as well as professional committees. On the other hand, tax authorities have to en-cash their revenue at the earliest inorder to meet their expenses and also the country’s budget requirement. From this, it can be understood that early disposal of legal suit has two-way benefit for both the parties the taxpayers can use the time and money which would be spent on litigation for expansion of their business and the revenue department can use the revenue so recovered for countries? infrastructural improvement which would have a positive impact on the country?s GDP. This clearly indicated the two parties are extremely motivated to resolve their issues. Hence, if mediation takes place, there is a high chance that the parties would come to an amicable settlement and it is less likely that delays would happen. Further, under mediation, the resolution of the dispute is not in the hands of any third party, rather it is in the hands of the parties themselves. Additionally, there would not be any procedural delays as in the case of various measures adopted introduced by the Indian government which were ineffective like the AAR?s. Hence, the benefits of mediation when it comes to tax disputes are multifold. It saves people a lot of time, costs, risks, stress, pride and relationship.
16 Leonora Meyercord, Avoiding State Bankruptcy: Mediation as an Alternative to Resolving State Tax Disputes, 29 REV. LITIG. 925 (2010).

Mediation Type used in Tax disputes

In general there are three types of mediation which are: Facilitative Mediation, Evaluative Mediation, and Transformative Mediation.17 In the first type mediation, called the facilitative mediation, the mediator serves as a facilitator who merely assists the parties to arrive at a resolution to the current issue. Second, in Evaluative Mediation, the mediator serves as an evaluator and may, if requested, express an opinion on the merits of the dispute after their evaluation. Under this type, the mediators provide the parties with their suggestions. Third, Transformative Mediation is a type of mediation under which the mediator rather than focusing on resolving the issue immediately, the mediator focuses on encouraging the parties to mutually recognize each other?s needs and interests. Further, Med-Arb is a combination of mediation and arbitration, under which once the mediation between the parties fails then under such circumstances the mediator will assume the role of an arbitrator and pass a decision which is binding on the parties Given that India already has a tribunal system which is established for resolving disputes relating to tax, arbitration as an alternate form of dispute resolution would not be the most appropriate option for such dispute resolution. Further, when it come to the three types of mediation, the most appropriate type of mediation for resolution of tax disputes would be facilitative where the parties reach a settlement with a push from the mediator. Evaluative Mediation is likely to be effectives considering the fact that presence of government as one party may affect the process and lastly Transformative Mediation would not be beneficial as the focus of such mediation is not on immediate resolution of dispute. To some extent, facilitative and evaluative mediation can be combined like where facilitative mediation is taking place, the parties may ask the mediator for evaluate and provide suggestions on certain specific unresolved issues.
17 Katie Shonk, Types of Mediation: Choose the Type Best Suited to Your Conflict, PON – PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL (2022), https://www.pon.harvard.edu/daily/mediation/typesmediation-choose-type-best-suited-conflict/

Tax Mediation in the Indian Context

The Law Commission of India pointed out that the traditional adjudicatory form of tax laws in India are very similar to those in UK as the procedure for tax litigation in India has been borrowed from UK Income Tax laws.18 Hence, the laws relating to tax disputes are quite complex in both the countries, thereby making the law less taxpayer friendly. Further, court orders on tax disputes are highly subjective to the facts of a particular case. Hence there is a lot of uncertainty when it comes to proper interpretation of tax issues. Mediation as a dispute resolution mechanism would help the parties avoid the complex tax dispute resolution process and allow parties to settle their dispute based on their interests and needs. Over the years, UK having realised that through time the existing conventional mechanisms of tax dispute resolution system in the country is unable to resolve tax disputes, has swiftly modified its tax dispute resolution mechanism to meet the needs of the contemporary world. After evaluating the effectiveness of the mediation process for a range of direct and indirect tax disputes, Her Majesty’s Revenue and Customs („HMRC?) in the UK has adopted mediation as an alternate tax dispute resolution mechanism in the country.19 In comparison to India, where mediation has been an olden day practice, under the UK Jurisprudence it is recent development for dispute resolution. Even then the HMRC went ahead with adopting mediation as a tax dispute resolution mechanism. However, on the other hand in India the irony is that the mediation bill, 2021, has explicitly excluded tax disputes from the ambit of mediation as disputes which are not mediatable as per section 7 read with first schedule of the mediation bill, 2021.20 Hence, even if the bill is passed as legislation there will not be any positive effect on tax disputes. Therefore, through this paper it is recommended that tax matters be excluded from the first schedule of the mediation bill before making it legislation. Under the Indian system, over the years we have seen the effectiveness of mediation centers and Lok Adalat?s while dealing with various cases in our country. This dispute resolution mechanism has been effective in disposing various non compoundable offence like the traffic challan cases, rent disputes. Additionally, family and property disputes have been amicably settled. Even the tax authorities in India have often come up with temporary tax settlement schemes which have been effective in resolving tax disputes. Considering the effect that efficient mediation mechanisms have had on the burden on courts in matters such as family disputes or settlements under Lok Adalat?s, we can infer that extending the mediation infrastructure to taxation matters could be beneficial in significantly reducing the tax litigation pending in Indian courts. So, in India, having a mediation center or Lok Adalat like that is already present with a certified mediator having expertise in taxation will aid positively in resolving tax disputes. Certification can be from any mediation training centers and if the mediation bill is passed as a legislation, then such centers should be recognised by the mediation council of India. From the statistics of UK on Mediation to resolution of tax disputes, it can be seen that 79% of tax disputes of small and medium enterprise were resolved within 120 days and further mediation resolved 83% of the large and complex tax disputes in UK.21 Relying on UK statistics, it can be observed that mediation has played a vital role in reducing pending tax litigation in the UK. Hence, the approach adopted by HMRC in the UK would be a suitable way to handle the significant backlog of tax litigation in India considering that both countries’ tax dispute resolution systems originate from the common law itself. However, the Indian authorities while attempting to adopt the UK system in India have to be mindful of the fact that there are various cultural and socio-political differences between the two countries. Further, the government can also focus on setting up a committee which is headed by some retired judge with knowledge in taxation and mediation to come up with recommendations to implement the UK mediation mechanism into the Indian taxation. The committee can also oversee the tax mediation and come up with strategies for its betterment in the country
18 Sriram Govind and Samira Varanasi, Dispute Resolution In Tax Matters: An India-UK Comparative Perspective, 9 INTERNATIONAL TAXATION 79 (2013), https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Dispute_Resolution_in_Tax_ Matters.pdf
19 DELOITTE, MEDIATION CAN GET THINGS MOVING | AN ALTERNATIVE APPROACH TO RESOLVING TAX DISPUTES, https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/tax/deloitte-uk-tax-las-adr-brochure.pdf 20 The Mediation Bill, No. 43 of 2021, GAZETTE OF INDIA, https://www.egazette.nic.in 21 Clara Beeri Kasser-Tee, Tax Assessment, Tax Disputes and Mediation: Making it easier for the Taxpayer and the Commissioner General of the Ghana Revenue Authority, BUSINESS & FINANCIAL TIMES

CONCLUSION

Citing UK as an example, it can be said that mediation not only reduces litigation time and cost, but it has also been effective in resolving complex tax disputes. Hence, in conclusion, it is submitted that mediation is not a complete alternative to tax litigation in the country but it is rather an initial step towards resolving tax disputes. Having pre-litigation tax mediation and then resorting to litigation if the dispute is not resolved, will be advantageous for the country. The parties to tax dispute should resort to mediation primarily for dispute resolution and pursue litigation only as a last choice. Hence, the focus of the government and the tax department should be on creating more awareness about tax mediation. Resorting to mediation would foster a healthy relationship between the two parties where the government will understand the plight of a taxpayer and vice-versa. This will further aid in increasing the trust of the taxpayers in the government and there would be better tax regimes in the country.