Proposed changes to the Defence Honours and Awards Appeal Tribunal would redefine the period for reviewable decisions to 20 years from the end of the relevant operation.
The amendments have been criticised by veterans and their families, the tribunal itself and politicians of all stripes.
The coalition, Greens and independents teamed up in the Senate to dump the legislation that was introduced to the parliament in August by Veterans' Affairs and Defence Personnel Minister Matt Keogh.
Handing down his report on the proposal, parliamentary inquiry chair and Labor senator Raff Ciccone did not explicitly back his government's legislation.
Making two recommendations, the committee instead urged Defence to undertake further consultations with the tribunal and veterans' groups on the 20-year limitation.
The Senate should defer its consideration of the legislation until Defence has finished and makes public the outcome of its consultations, the report reads.
The tribunal was set up in 2011 as an independent body to review Defence decisions against recommending an ADF member or veteran for an honour or award.
Committee members from the coalition, Greens and independents including senator Jacqui Lambie - an army veteran - released dissenting reports slamming Labor's plans.
They called for the bill to be immediately withdrawn.
The coalition said it was unconvinced the bill addressed "any significant problem" and that the government had "no option but to abandon it entirely".
"We note neither the minister or Defence have provided any credible justification for the restructuring of the tribunal or the severe curtailing of the rights of ADF personnel, veterans and their families," the report said.
Opposition veterans' affairs spokesman Darren Chester said the inquiry received negative feedback about the changes and called on Mr Keogh to do the "honourable thing" in withdrawing the "unloved" bill.
"Labor MPs have privately told me they are embarrassed by the changes proposed by Minister Keogh and the bill is unsalvageable," he said.
"Forget about more consultation, the prime minister should just bin the bill."
In his dissenting report, Greens senator David Shoebridge called on Labor to withdraw the bill "as a statement of good faith with the veterans community".
Senator Lambie described the legislation as a "solution looking for a problem" that would make it harder for veterans and their families to receive recognition.
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