Arbitrability of Tax and Fiscal Disputes in India

The arbitrability of tax disputes in India turns on one distinction: the levy, assessment or collection of a tax is a sovereign function and is non-arbitrable, while a contract that only decides who bears a tax between two parties can be arbitrated. This page maps which tax and fiscal disputes fall inside and outside arbitration.

In a 2026 ruling, the Allahabad High Court held that a contractor’s claim for unpaid dues stayed arbitrable even though the paying party had withheld money citing GST compliance, because a dispute over a contract is not a dispute over the State’s power to tax. Hearing a petition under Section 11 of the Arbitration and Conciliation Act, 1996, the Court relied on Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 and appointed an arbitrator, drawing a clean line between the sovereign levy of tax, which no private tribunal may touch, and a contractual dispute that merely involves tax. That line, reaffirmed in Shri Pramhans Enterprises v. Varanasi Aurangabad NH-2 Tollway, is the whole subject of this article.

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This article explains which tax and fiscal disputes are arbitrable in India, which are shut out because they touch the power to tax, how foreign investors have arbitrated Indian tax measures under investment treaties, and how to draft a tax clause that keeps a dispute inside arbitration.

Arbitrability of tax and fiscal disputes in India: the line at a glance

The arbitrability of tax and fiscal disputes in India falls on two sides of a single line. On one side sits the State’s power to impose, assess and collect a tax, which is a sovereign function and cannot be handed to a private arbitrator. On the other sits a contract between two parties that happens to involve a tax, which an arbitrator can decide like any other commercial dispute.

Which side a dispute lands on does not depend on the label “tax”. It depends on what you are asking the tribunal to decide. Ask it to strike down an assessment, refuse a levy, or grant a statutory concession, and it has no power to act, because those are questions about the State’s revenue and about the rights of the public at large. Ask it to enforce who bears a tax under your contract, and it can, because that is a private dispute between two contracting parties.

The source of this line is the four-fold test for non-arbitrability, which the courts apply to every subject matter, not only to tax. The broader framework that decides arbitrability across all subjects, from fraud to intellectual property, is set out in our guide to arbitrability of disputes in India. This article takes that framework and applies it to the tax and fiscal field, where the sovereign-function limb does most of the work.

Why are tax disputes treated as non-arbitrable in India?

Tax disputes are treated as non-arbitrable because levying a tax is an inalienable sovereign function, and the test the Supreme Court laid down in Vidya Drolia keeps sovereign functions out of private arbitration. The Court held that a dispute is non-arbitrable where its subject matter relates to actions in rem rather than subordinate rights in personam, affects third parties with an effect against the world, concerns the inalienable sovereign and public-interest functions of the State, or is excluded from arbitration by a statute, whether expressly or by necessary implication. It named the imposition and levy of tax as an example of the sovereign category.

A tax dispute fits that category on more than one ground. A tax assessment does not settle a private account between two people; it fixes what a taxpayer owes the public exchequer, so it operates against the world and carries public-interest consequences that a private award cannot bind. The revenue collected funds the State, and a tribunal chosen by two parties has neither the authority nor the mandate to decide how much of it is due.

What did Vidya Drolia and Booz Allen decide about non-arbitrable disputes?

Vidya Drolia and Booz Allen together built the framework that decides what cannot be arbitrated. In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, the Supreme Court drew the distinction between rights in rem, which bind the world and are for public fora, and rights in personam, which bind specific parties and can go to arbitration. It listed categories that courts had long treated as non-arbitrable, including criminal offences, matrimonial disputes, insolvency and winding up, and testamentary matters.

Vidya Drolia refined that approach into the four-fold test and folded the sovereign functions of the State into it. Tax did not appear on the Booz Allen list of categories, but the sovereign-function limb in Vidya Drolia captures it, because imposing and collecting a tax is an exercise of sovereign authority that the Court placed outside the reach of a private tribunal. The two rulings are the starting point for any arbitrability question, tax included.

How do tax statutes exclude arbitration by necessary implication?

Tax statutes exclude arbitration by necessary implication because each of them builds a complete adjudication code of its own, and a self-contained statutory remedy leaves no room for a private tribunal. The fourth limb of the Vidya Drolia test asks exactly this: has a statute, expressly or by necessary implication, reserved the dispute for a particular forum?

The tax codes answer yes. The Income Tax Act, 1961 sends a disputed assessment to the Commissioner (Appeals), then the Income Tax Appellate Tribunal, the High Court and the Supreme Court. The Central Goods and Services Tax Act, 2017 routes a GST demand through the adjudicating authority, the appellate authority and the Goods and Services Tax Appellate Tribunal. The Customs Act, 1962 provides its own adjudication and appeals up to the Customs, Excise and Service Tax Appellate Tribunal. Each of these is an exclusive channel with its own limitation periods, appeal rights and specialist forum, and Parliament did not leave the taxpayer free to bypass it by writing an arbitration clause.

Which tax and fiscal disputes are non-arbitrable?

The non-arbitrable tax and fiscal disputes are the ones that ask a tribunal to sit in judgment over the State’s revenue: an income-tax assessment, a GST demand, a customs valuation, a claim to a tax concession or exemption, and any penalty or prosecution that flows from them. In each, the real question is whether the State may tax, and how much, which is the sovereign question a private award cannot answer.

A claim to a tax concession sits squarely in this group. In M/s Shree Enterprise Coal Sales Pvt. Ltd. v. Commissioner of Commercial Taxes, a coal trader that bought through a public e-auction sought the benefit of a concessional tax treatment and argued the dispute could be arbitrated under the auction terms. The Supreme Court held that the claim was not a contractual claim at all but a demand for a statutory tax concession, and that a dispute over a tax concession is not arbitrable. It set aside the High Court’s contrary view.

The same logic covers penalties, interest and prosecution under the tax statutes, because these are consequences the State imposes in its sovereign capacity, not terms two parties negotiated. A tribunal cannot cancel a penalty order or read down a levy any more than it can decide the assessment that produced it. Where the dispute is about the State’s charge, the door to arbitration is closed.

Can a contractual dispute involving tax still be arbitrated?

Yes. A contractual dispute that only decides who bears a tax as between the parties is arbitrable, because the tribunal rules on the contract, not on the validity of the levy. Commercial contracts allocate tax risk all the time, through gross-up clauses, indemnities, reimbursement terms and price-adjustment provisions that shift the burden of a future tax change. A dispute over one of those clauses is a private dispute in personam, and it belongs to the forum the parties chose.

The distinction is practical, not merely formal. When an arbitrator decides that a buyer must reimburse a seller for GST charged on a supply, the arbitrator is not deciding whether the GST was lawfully levied; the tax department can still recover the GST from whoever is liable under the statute, whatever the contract says between the parties. The award binds the two contracting parties inter se and leaves the State’s revenue untouched, which is why it stays within the arbitral field.

This is the line the Allahabad High Court applied in the Shri Pramhans dispute. A contractor claimed unpaid dues under a road project; the paying company withheld part of the money, citing alleged non-compliance with GST requirements and demanding an indemnity bond, and ignored the contractor’s arbitration notice. Hearing a petition for appointment of an arbitrator, the Court held that the dispute arose from the contract and was arbitrable even though it was tangled up with GST compliance, because it did not ask anyone to rule on the sovereign levy of tax. It appointed a sole arbitrator. The mechanics of that appointment route are explained in our guide to the appointment of arbitrators under Section 11.

How have foreign investors arbitrated India’s tax measures?

Foreign investors have arbitrated India’s tax measures through investment-treaty arbitration, and India lost two high-profile cases before it removed tax from the reach of its treaties. This is a different channel from domestic arbitrability. A bilateral investment treaty (BIT) is an agreement between two states, and it lets a foreign investor bring the host state before an international tribunal for breaching treaty protections, including the guarantee of fair and equitable treatment. That consent comes from the treaty, not from a private contract, so the domestic rule that tax is non-arbitrable does not govern it.

Two awards in 2020 made the point. In Vodafone International Holdings BV v. Union of India, a tribunal at the Permanent Court of Arbitration held that India’s use of a retrospective amendment to the Income Tax Act, 1961 to tax a 2007 share acquisition breached the fair and equitable treatment standard under the India-Netherlands BIT. Months later, in Cairn Energy Plc v. Republic of India, another Permanent Court of Arbitration tribunal found the same retrospective tax demand breached the India-United Kingdom BIT and ordered India to pay compensation of about 1.2 billion US dollars plus interest and costs.

India’s response reshaped the landscape. Parliament repealed the retrospective tax through the Taxation Laws (Amendment) Act, 2021, refunding amounts collected under it, and the government settled the disputes. India had already recast its treaty practice: its 2016 Model BIT carves taxation out of the treaty’s scope, so tax measures are excluded from investor-state arbitration under the newer generation of treaties. For an investor structuring an India-facing deal, the treaty route to arbitrating a tax measure is far narrower than these headline awards suggest, a point that sits alongside the wider cross-border tax and structuring issues discussed in this account of cross-border M&A in India. The treaty-level machinery and how India-seated and foreign-seated arbitrations differ are covered in our guide to international commercial arbitration in India.

India removed tax from its 2016 model investment treaty

India’s 2016 Model BIT treats taxation as a matter for the state, not for an arbitral tribunal, and excludes tax measures from the protections the treaty otherwise offers. The change was a direct reaction to the Vodafone and Cairn awards, which had exposed India to treaty liability for a domestic tax choice. By carving tax out at the treaty-drafting stage, India shut the door that those investors had walked through, so future tax measures are far less likely to be second-guessed by an investment tribunal.

What happens if a non-arbitrable tax dispute is referred to arbitration?

If a non-arbitrable tax dispute is referred to arbitration, a court will refuse to send it there, and any award made on it can be set aside or refused enforcement. The safeguards operate at three stages, and a party cannot cure inarbitrability by simply proceeding.

At the referral stage, a court asked to refer parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, or to appoint an arbitrator under Section 11, applies a prima facie test and declines to refer a dispute that is plainly non-arbitrable. A tribunal that has already been constituted can rule on its own jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996, but that power to decide its own competence does not let it confer arbitrability on a subject the law has placed off limits.

If a tribunal decides a non-arbitrable tax question anyway, the award is vulnerable. A domestic award can be set aside under Section 34 of the Arbitration and Conciliation Act, 1996, which lets a court set aside an award where the subject matter is not capable of settlement by arbitration or where the award conflicts with the public policy of India. A foreign award can be refused enforcement on the same two grounds under Section 48 of the Arbitration and Conciliation Act, 1996. The question of who decides arbitrability, the court or the tribunal, is explored in our guide to kompetenz-kompetenz and separability of the arbitration clause, and the grounds and procedure for challenging an award are set out in this guide on how to challenge an arbitral award under Section 34.

How should you draft a tax clause to keep the dispute arbitrable?

To keep a tax-related dispute arbitrable, draft the clause as a contractual allocation of tax between the parties, and keep any challenge to the levy itself out of the tribunal’s hands. The tribunal can decide who carries a tax under the contract; it cannot decide whether the tax was due, so a clause that asks it to do the second invites a jurisdictional fight and a vulnerable award.

Frame the obligation in contractual terms. Say which party bears a named tax, how a change in law or rate is shared, and how one party reimburses or grosses up the other, so the dispute is about performance of the contract rather than the correctness of an assessment. Keep the statutory challenge on its own track: a demand under the Income Tax Act, 1961 or the Central Goods and Services Tax Act, 2017 is contested before the tax authorities and their appellate forums, and the contract should not pretend an arbitrator can override that route.

Then settle the mechanics that make the clause work. Choose the seat and the institution with the enforcement consequences in mind, define the disputes that go to arbitration narrowly enough to exclude any question about the validity of a levy, and record the tax allocation clearly so the tribunal is deciding a contract term and not a revenue question. Drafted this way, a tax-related commercial dispute stays where the parties want it, inside arbitration, without straying into the sovereign field the courts keep out.

Frequently asked questions

Are tax disputes arbitrable in India?

Tax disputes are not arbitrable in India when they concern the State’s power to impose, assess or collect a tax, because that is a sovereign function that the four-fold test in Vidya Drolia keeps out of private arbitration. A contractual dispute that only allocates a tax between two parties is a different matter and can be arbitrated, because the tribunal decides the contract rather than the validity of the levy.

Is a GST dispute arbitrable?

A GST dispute is arbitrable only if it is a contractual dispute between parties, such as whether one party must reimburse GST to the other under their agreement. A challenge to a GST demand, assessment or input-tax-credit denial is not arbitrable, because the Central Goods and Services Tax Act, 2017 provides its own adjudication and appeals through the GST Appellate Tribunal, which is the exclusive route.

Can an arbitrator decide who bears a tax under a contract?

An arbitrator can decide who bears a tax as between the parties to a contract, because that is a private right in personam. The award binds only the parties and does not affect the tax department’s right to recover the tax from whoever is liable under the statute, so it stays within the arbitral field.

Are tax concession or exemption disputes arbitrable?

Disputes over a tax concession or exemption are not arbitrable, because they ask a tribunal to grant a statutory benefit rather than to enforce a contract. The Supreme Court held in the Shree Enterprise Coal Sales case that a claim to a concessional tax treatment was not a contractual claim and could not be arbitrated.

Can foreign investors arbitrate Indian tax measures under a treaty?

Foreign investors have arbitrated Indian tax measures under bilateral investment treaties, and both the Vodafone and Cairn Energy tribunals found India’s retrospective tax breached treaty protections. India has since repealed the retrospective tax and carved taxation out of its 2016 Model BIT, so the treaty route to challenging a new tax measure is now much narrower.

References

Case law

1. Booz-Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532
2. Cairn Energy Plc v. Republic of India, PCA award, December 2020 (India-United Kingdom BIT)
3. M/s Shree Enterprise Coal Sales Pvt. Ltd. v. Commissioner of Commercial Taxes (Supreme Court of India)
4. M/s Shri Pramhans Enterprises v. Varanasi Aurangabad NH-2 Tollway (P) Ltd. (Allahabad High Court, 2026)
5. Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1
6. Vodafone International Holdings BV v. Union of India, PCA award, September 2020 (India-Netherlands BIT)

Statutes

1. Income Tax Act, 1961 (appellate machinery: Commissioner (Appeals), Income Tax Appellate Tribunal, High Court, Supreme Court)
2. Customs Act, 1962 (adjudication and appeals up to CESTAT)
3. Arbitration and Conciliation Act, 1996 sections cited: 8, 11, 16, 34, 48
4. Central Goods and Services Tax Act, 2017 (adjudicating authority, appellate authority, Goods and Services Tax Appellate Tribunal)
5. Taxation Laws (Amendment) Act, 2021 (repeal of the retrospective tax)

Related reading

1. Arbitrability of disputes in India
2. Appointment of arbitrators under Section 11
3. Kompetenz-kompetenz and separability of the arbitration clause
4. International commercial arbitration in India

This article is for informational and educational purposes only and does not constitute legal advice. Readers should consult a qualified legal practitioner for advice on their specific circumstances.