Tax litigation: FICCI flags Rs 18 lakh crore stuck in appeals, seeks overhaul of faceless system

Around 5.4 lakh cases remain pending before the commissioner of income tax (appeals) CIT(A) as of April 1, 2025.

Industry body Federation of Indian Chambers of Commerce and Industry (FICCI) has flagged growing pendency in income tax appeals, urging the government to take urgent measures to streamline the faceless appeal system and clear the massive backlog of cases.

In its pre-budget 2026–27 memorandum on direct and indirect taxes submitted to the Revenue Secretary Arvind Shrivastava on October 28, 2025, FICCI said that around 5.4 lakh cases involving Rs 18.16 lakh crore remain pending before the commissioner of income tax (appeals) CIT(A) as of April 1, 2025.

“The reduction of pendency before CIT(A) is critical to the success of the new Faceless Appeal system and to alleviate hardships faced by taxpayers by way of demands and blockage of refunds,” the industry body said.

Faceless system

The faceless appeal regime, introduced in 2021 to minimise physical interface during the Covid-19 pandemic, has led to serious implementation challenges, according to FICCI. The industry body said the mechanism “does not seem to have adequate monitoring of its functioning” and “non-familiarity with technology adds to delays in disposal of cases.”

Even though taxpayers file submissions on the portal, FICCI noted that repeated notices are issued on the same issues and that requests for virtual hearings are often denied or delayed. “In cases where virtual hearing is granted, there are issues in presenting documents to assist taxpayers in making representations,” it said.

The industry body also pointed out that there is no time limit for assessing officers to respond to remand reports, causing further delays and confusion over whether jurisdictional or faceless units should handle such tasks.

Dual-track disposal

To address the problem, FICCI has proposed a major overhaul of the system, beginning with filling 40 percent of vacancies at the CIT(A) level through internal promotions, transfers, or external recruitment.

It also suggested introducing a dual-track disposal system – one for simple or low-value cases to be cleared through fast-track disposal, and another for complex, high-value cases to undergo detailed examination. “There should be differentiated timelines and Central Action Plan (CAP) targets set for each track, alongside segregation for old and new cases,” FICCI said.

The chamber emphasised that the existing CAP target of disposing of 2 lakh cases and Rs 10 lakh crore of disputed demand is unrealistic without capacity augmentation and differentiated timelines.

FICCI suggested that where appeals remain pending for more than two years without taxpayer fault, a mandatory stay on demand should apply, along with refund of any recovered amount.

The industry body also urged the Central Board of Direct Taxes (CBDT) to set a 30–90 day timeline for assessing officers to respond to remand reports, with cases of non-compliance escalated to superior officers.

Simplify TDS structure

Calling for rationalisation of the tax deducted at source (TDS) regime, FICCI said that the current system — with 37 different TDS provisions and rates ranging from 0.1 percent to 30 percent — adds to the compliance burden and leads to litigation.

“The continuous expansion of TDS provisions has added to the compliance burden of taxpayers,” FICCI said, noting that classification disputes and cash flow blockages are frequent outcomes.

The chamber suggested that the government move towards three TDS rate categories – salary at slab rates, lotteries and online games at the maximum marginal rate and; two standard rates for all other payments.

It also proposed exempting B2B transactions subject to GST from TDS, and introducing a “negative list” for payments to senior citizens, farmers, banks, and other exempt categories.

“The government has made a good start by reducing several TDS rates. Going forward, this simplification process must continue,” it said.

Fast-track demergers

FICCI also sought clarity on tax neutrality for fast-track demergers under Companies Act, 2013, which currently do not enjoy the same tax treatment as conventional demergers approved by the National Company Law Tribunal (NCLT).

“The objective of introducing fast-track mergers and demergers was not to reduce regulatory scrutiny but to promote ease of doing business and declog the NCLT,” FICCI said. It recommended that the government amend the new Income Tax Act, 2025, to include fast-track demergers within the definition of tax-neutral reorganisations.

“A fast-track demerger saves time of several months taken for obtaining NCLT approval in conventional demerger. If fast track demerger is not granted tax neutrality, no company will use this route, defeating the government’s intent to improve ease of doing business,” it cautioned.

Ease of doing business

FICCI said the cumulative effect of prolonged litigation, complex TDS procedures, and limited corporate restructuring flexibility undermines India’s business environment.

It called for time-bound, technology-enabled reforms in tax administration to strengthen investor confidence as the new Income Tax Act, 2025, takes effect from April 2026.