The Union Budget 2025 introduces significant amendments to the GST framework, addressing critical areas such as Input Tax Credit (ITC) distribution, compliance measures, the track-and-trace mechanism, and voucher taxation. Below, we explore each of these proposals in detail and their potential impact on businesses and compliance.
1. Amendment to ISD Mechanism for Reverse Charge Taxation
Change: Section 2(61) of the CGST Act has been amended to allow the Input Service Distributor (ISD) to distribute input tax credit (ITC) for inter-state supplies taxed on a reverse charge basis. This includes common input services, where the ISD can now pay GST on reverse charge for these services and distribute the corresponding credit to distinct persons registered under the same PAN.
Impact: This amendment, effective from April 1, 2025, simplifies the process of distributing ITC for common services across different branches of the same legal entity. Businesses that were previously struggling with the correct mechanism for such inter-state ITC distribution will find this change beneficial. It also brings clarity to issues raised in the past, especially after the 50th GST Council meeting’s recommendations.
2. Clarification on ‘Local Fund’ and ‘Municipal Fund’ Definitions
Change: The amendment to Section 2(69)(c) of the CGST Act introduces an explanation to define the terms “Local Fund” and “Municipal Fund” under the definition of a “local authority.”
Impact: This amendment ensures clarity regarding the scope of ‘local authority’ by offering a concrete definition of these terms. This move is particularly important for local governments and municipalities, as it will help them understand their obligations under GST more clearly, ensuring better tax compliance.
3. Introduction of Track and Trace Mechanism for Tax Evasion-Prone Goods
Change: Section 148A of the CGST Act introduces a Track and Trace Mechanism for specified commodities prone to tax evasion. The mechanism requires the use of software-readable technologies, such as barcodes or RFID tags, to monitor the movement of goods throughout the supply chain.
Impact: This provision, proposed by the GST Council in its 55th meeting, aims to combat tax evasion by tracking goods from manufacturer to end-user. It will likely be implemented for goods such as tobacco, pan masala, scrap, plastic, and paper. Non-compliance will lead to severe penalties, in addition to penalties for general GST violations. This initiative promises to strengthen GST compliance and reduce illicit activities within these high-risk sectors.
4. Omission of ‘Time of Supply’ Provisions for Vouchers
Change: Sections 12(4) and 13(4) of the CGST Act have been amended to omit the provisions related to the “time of supply” for vouchers. The GST Council clarified that vouchers do not qualify as goods or services and, hence, will not attract GST upon issuance or transfer.
Impact: This change effectively removes GST from the issuance or transfer of vouchers, recognizing them as prepaid payment instruments rather than taxable goods or services. Businesses will no longer have to track the time of supply for vouchers, and GST will only apply when the voucher is used to purchase goods or services. This simplifies voucher-related compliance significantly.
5. Amendment to Input Tax Credit on Plant and Machinery
Change: Section 17(5)(d) of the CGST Act has been amended to substitute the term “plant or machinery” with “plant and machinery” retroactive to July 1, 2017. This amendment nullifies the Supreme Court’s decision in the case of Safari Retreats, where the Court ruled that certain buildings could qualify as plant if they passed the functionality test.
Impact: This change aligns with the GST Council’s decision to limit ITC on buildings, land, and civil structures while clarifying that only plant and machinery are eligible for ITC. The retrospective effect of this amendment ensures that businesses must adhere to the new rule for previous periods. This provision addresses ambiguities, ensuring better tax enforcement on capital goods and immovable properties.
6. Revised ISD Provisions for Reverse Charge and ITC Distribution
Change: Sections 20(1) and 20(2) of the CGST Act are amended to explicitly provide for the ISD to distribute ITC related to reverse charge tax on inter-state services. The revised provisions ensure that the ISD can now pay reverse charge tax and distribute ITC for such inter-state services among distinct persons under the same PAN.
Impact: The change, effective from April 1, 2025, is designed to streamline the ITC distribution process for services that are subject to reverse charge. Businesses will benefit from simplified compliance, allowing for better management of cross-border tax obligations within their entities.
7. Clarification on Reversal of ITC for Credit Notes
Change: Amendments to Section 34(2) of the CGST Act and the introduction of a new provision specify that recipients must reverse the ITC related to credit notes issued by suppliers. This ensures that the supplier’s reduction in output tax liability is valid only when the recipient does not retain the credit associated with the credit note.
Impact: This provision closes loopholes where the recipient might retain ITC on a credit note that the supplier has used to reduce their tax liability. It ensures seamless reconciliation between suppliers and recipients, reducing disputes and enhancing compliance in credit note adjustments. This also supports the automation of compliance processes through systems like GSTR-3B and Invoice Matching System (IMS).
8. Omission of ‘Auto-Generated’ Reference in Filing Provisions
Change: The expression “auto-generated” has been removed from provisions related to the GST reconciliation process under Section 38. This primarily impacts the process of GST return reconciliation via the Invoice Management System (IMS).
Impact: This change significantly streamlines the reconciliation of Input Tax Credit (ITC). Previously, the term “auto-generated” suggested that the GST reconciliation was automatically handled based on the data submitted. However, now that the term is removed, the process will be managed with a greater emphasis on system-generated data, which allows for more transparency and flexibility in reconciling ITC claims. The system will now actively verify inward supplies through GSTR-2B, ensuring that the ITC matches exactly with the supply details.
9. Broadened Scope of Information in Input Tax Credit Statement
Change: Clause (b) has been updated to replace “auto-generated” with “including,” and clause (c) has been added, allowing more comprehensive data to be included in the ITC statement under Section 38.
Impact: This change provides a broader and more detailed picture of a taxpayer’s ITC position. The Input Tax Credit statement will now include a wide range of data beyond auto-generated transactions, offering clearer insights into eligible credits. The update will help businesses identify discrepancies and correct mistakes before submitting returns. A business may find that certain suppliers have mistakenly omitted invoices in their GSTR-1 filings, leading to the exclusion of those invoices from the ITC statement. With this change, the business will be able to easily spot these discrepancies and take corrective actions before filing its GSTR-3B.
10. Introduction of Return Filing Conditions and Restrictions
Change: A new enabling clause has been added to Section 39(1) that provides the government with the power to prescribe conditions and restrictions on the filing of GST returns.
Impact: This new provision introduces more control over the return filing process, allowing tax authorities to set stricter conditions for filing GST returns. These conditions may include ensuring that taxpayers have cleared all dues, submitted accurate data, or filed previous returns before allowing further submissions. This will prevent erroneous filings and reduce fraud. A taxpayer may not be able to file their return if they have pending dues from earlier periods. This amendment ensures compliance before returns are processed, promoting transparency and reducing the chances of evasion or incorrect claims.
11. Restriction on Filing Returns for Unpaid Taxes
Change: Rule 59(6) mandates that taxpayers must clear all outstanding taxes from previous periods before filing Form GSTR-3B for the current period.
Impact: This restriction ensures that businesses do not overlook or delay paying their taxes, especially for prior periods. By enforcing this rule, the government ensures that businesses are compliant with tax obligations before proceeding with their current filings. This also encourages tax-paying discipline and streamlines the return process. If a business has a backlog of unpaid taxes from past quarters, it will not be able to file its GSTR-3B for the current quarter until the previous taxes are paid off. This prevents businesses from using new tax filings as a way to offset old liabilities, improving the overall cash flow and tax compliance of businesses.
12. Time Limit for Filing Belated Returns Introduced
Change: A specific time limit of 3 years has been introduced for filing belated Form GSTR-1 from October 01, 2023.
Impact: This change creates a defined window for businesses to file belated returns, eliminating the previous ambiguity on the matter. A strict time limit encourages businesses to file returns on time and reduces delays, thus promoting a more efficient and predictable tax system. It also discourages unnecessary backlog accumulation of returns. If a business misses the deadline for filing GSTR-1, it now has a clear 3-year period to rectify its mistake and file the return. This is a clear and enforceable timeline, making businesses more accountable and ensuring that no tax obligations are left unresolved for extended periods.
13. Reduced Pre-Deposit Requirement for Penalty Appeals
Change: The pre-deposit requirement for appeals involving only penalties has been reduced from 25% to 10%.
Impact: By lowering the pre-deposit requirement for penalty appeals, the government has made it easier for taxpayers to appeal penalty decisions without facing a heavy financial burden. This change ensures that taxpayers who dispute penalties can proceed with their appeals while ensuring compliance and payment of dues. A taxpayer who believes they were unfairly penalized for non-compliance can now appeal the decision by depositing only 10% of the penalty amount, making it easier to pursue legal recourse without facing immediate financial strain. This change incentivizes taxpayers to appeal penalties rather than let them go uncontested.
14. Mandatory Pre-Deposit for Penalty Appeals at Tribunal Level
Change: A mandatory 10% pre-deposit requirement for appeals before the Appellate Tribunal has been introduced in Section 112(8).
Impact: This new requirement introduces an additional step in the penalty appeal process, ensuring that taxpayers are serious about their appeals and have a financial stake in the outcome. It also streamlines the appeal process by reducing frivolous or unnecessary appeals that could burden the system. If a taxpayer appeals a penalty for a late GST filing at the tribunal level, they will now be required to deposit 10% of the penalty amount before the appeal is heard. This ensures that only genuine cases are brought to the tribunal, promoting judicial efficiency.
15. Penalties for Non-Compliance with Track and Trace Mechanism
Change: A new section, 122B, has been introduced to penalize businesses that do not comply with the Track and Trace Mechanism (T&T) under Section 148A.
Impact: The introduction of penalties for T&T non-compliance aims to strengthen the accountability of the supply chain, especially for high-risk goods. This measure will ensure that goods in transit are properly tracked, reducing the chances of tax evasion, fraud, and loss of revenue. A manufacturer who fails to register goods under the T&T mechanism will now face penalties, thereby ensuring that businesses adhere to new tracking requirements. This measure will enhance traceability and transparency in supply chains.
16. Introduction of Track and Trace System for Specified Goods
Change: A Track and Trace Mechanism (T&T) has been introduced to monitor specified goods across their supply chain, in line with Section 148A.
Impact: The introduction of the T&T system will significantly enhance monitoring and reduce the risk of goods being diverted for non-taxable purposes. Goods that are part of the T&T system will be tracked, and non-compliance will result in penalties, ensuring that businesses adhere to supply chain regulations. This change aims to curb tax evasion and improve overall tax revenue collection. High-value or excise-sensitive goods like electronic devices or alcohol are often vulnerable to diversion for illegal sale or distribution. With the new T&T system, businesses will be required to track these goods from production to sale, ensuring tax compliance and reducing smuggling or tax evasion activities.
17. Clarification on GST Applicability for Goods in SEZ and FTWZ
Change: The GST applicability on goods stored in Special Economic Zones (SEZ) and Free Trade Warehousing Zones (FTWZ) has been clarified in Schedule III, with tax only applicable when goods are cleared for export or domestic consumption.
Impact: This change ensures clarity in tax treatment for goods in SEZ and FTWZ. Previously, there was confusion over the GST status of goods stored in these zones. Now, businesses operating in these zones will only be liable for GST when goods are either exported or sold domestically, leading to a more predictable tax landscape. A business storing raw materials in a FTWZ for future export can avoid GST liability until the goods are shipped out. Similarly, businesses using these zones to store products for eventual domestic sales will now know when GST will apply, avoiding unnecessary taxes on inventory that is merely in storage.
The Union Budget 2025 introduces a host of changes aimed at enhancing GST compliance, improving ITC management, and reducing tax evasion. These amendments will provide much-needed clarity, simplify processes, and ensure that businesses comply more effectively with GST laws. While certain provisions, such as the Track and Trace mechanism, may require businesses to adopt new technologies, the overall impact is positive—leading to a more transparent, efficient, and streamlined tax ecosystem. The focus on the ISD mechanism and credit note adjustments further reduces complexity in the ITC process, while changes around vouchers and plant and machinery definitions clarify key areas of dispute. These proposals set the stage for a stronger and more compliant GST regime in the upcoming fiscal year.