The government’s Viksit Bharat vision is reflected in the Union Budget with a persistent focus on ‘Make in India’, export promotion, and trade facilitation. In the Budget speech, the finance minister emphasised the tax department’s commitment to ‘trust first, scrutinise later’, which if applied efficiently, can ease the doing of business in India and help in creating certainties for foreign businesses.
India is emerging as a growing market for Global Capability Centers, which makes it even more crucial for the Indian government to adopt simple and minimal tax practices to attract more foreign investment. Despite the geopolitical uncertainties around the world, the finance minister displayed utmost confidence in India’s potential and introduced several tax reforms that support the government’s pledge to reduce the tax burden and move towards a trust-based tax framework.
The Goods and Services Tax (GST) collections have made a significant contribution to the total tax receipts of the government. The Economic Survey for FY25 has highlighted that for 23 States, GST was the main source of revenue among Own Revenue Receipts with the highest reliance in Manipur and Nagaland at 78 per cent and 72 per cent, respectively. To provide continuous relief to the taxpayers, the GST Council has met fifty-five times in the tenure of seven years to make recommendations with respect to GST rate changes, streamlining compliances in GST, and measures for facilitation of trade, among others. The Union Budget has echoed these recommendations by proposing the necessary amendments in the Finance Bill.
The customs tariff structure has been rationalised by removing seven tariff rates which will not only strengthen domestic manufacturing but also encourage exports. One can also see an evident alignment of the customs rate rationalisation with the government’s agenda of uplifting specific industries such as textiles, footwear, electronic goods, and toys. While the government has over the past years taken several policy measures like introducing amnesty schemes, faceless assessment to aid tax reform, further changes have been introduced to facilitate trade by simplifying tax processes and introducing voluntary declaration schemes to reduce tax disputes.
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The 2025 Union Budget introduces a series of amendments aimed at enhancing GST compliance and streamlining procedures. A key proposal includes an enabling clause that allows the government to prescribe conditions and restrictions for filing returns on the GSTN portal. This empowers the establishment of a comprehensive framework for GST compliance, aligning procedural updates with legal provisions to ensure all changes in the GST filing process are legally supported.
In a significant move to prevent tax evasion, the Budget proposes the implementation of a Track and Trace Mechanism for specified commodities prone to evasion. This involves affixing a unique mark on such goods or packages to monitor their movement throughout the supply chain. It is an example of the adoption of global best practices and seems to have been taken from the EU, UK, and Turkey.
Tax certainty
Addressing a long-standing concern, the Budget redefines the treatment of vouchers. Under the new provisions, vouchers are no longer considered a supply of goods or services and hence non-applicability of GST. This change eliminates ambiguities around their taxability, simplifying compliance for businesses involved in voucher transactions and providing clarity within the GST framework. Yet, another illustration where international treatment of vouchers as followed in the EU has been imbibed.
Credit note provisions have been amended whereby tax adjustments will require corresponding credit reversals by recipients who are registered. For the remaining situations, the tax incidence on supply must not be passed on. It becomes critical for assesses to properly monitor to ensure full compliance. A retrospective amendment has been proposed to put to rest the ambiguity on the taxability of the movement of goods stored in Special Economic Zones (SEZs) and Free Trade Warehousing Zones (FTWZs).
Transactions occurring prior to clearance for export or entry into the Domestic Tariff Area will not be regarded as a supply under GST. This is a welcome move and is effective from July 1, 2017.
Trust first, scrutinise later
In a progressive shift from traditional amnesty programmes, a new provision has been introduced to foster greater voluntary tax compliance under customs. This allows businesses to voluntarily revise entries concerning material facts after the clearance of goods, enabling them to pay any outstanding customs duties with interest but without penalties. This initiative offers a more flexible and penalty-free approach for rectifying post-clearance discrepancies, encouraging businesses to proactively manage their tax obligations.
Additionally, the aforesaid provision would also provide an option to claim a refund of customs duties in cases where additional duty has been discharged at the time of clearance of goods. This is a step in the right direction as almost in all such situations, the taxpayer was never allowed to get a refund for extra duties paid. Interestingly, these provisions apply to both importers and exporters.
Ease of doing business
The timeframe for utilising imported inputs under the Import of Goods at Concessional Rate Rule has been extended from six months to one year. Additionally, the frequency of filing related statements has been reduced from monthly to quarterly. These changes aim to streamline compliance processes and provide businesses with greater flexibility in managing their import activities. A new two-year deadline, extendable by one year, for finalising provisional assessments has been introduced to streamline administrative processes and boost efficiency. This measure was a demand from the taxpayers to assist in the timely closure of special valuation branch (SVB) assessments, ensuring quicker resolution and reducing uncertainty for businesses involved in import transactions.
Rationalisation of custom tariff
With a reduced tariff slab rate, it is clear that the government intends to achieve rationalisation of customs duty structure in India. In this Budget, seven tariff rates have been removed - 25 per cent, 30 per cent, 35 per cent, and 40 per cent reduced to 20 per cent, while 150 per cent, 125 per cent, 100 per cent reduced to 70 per cent.
It is to be noted that with this rationalisation, an effective rate of duty is still maintained by proposing appropriate cess on these products such as motor vehicles, bicycles, candles, and solar modules. This way, the government has aimed both at rationalisation of tax rates and not majorly impacting the overall revenue of the government. However, a key consideration is that the reduction in tariff rates will also lead to a reduction in classification disputes.
Further, in line with the spirit of uplifting common people, promoting domestic manufacturing, and export competitiveness, import duties on various products have been exempted. A few are mentioned below:
- Life-saving drugs particularly for cancer and rare/chronic diseases
- Critical minerals like lead, zinc, cobalt powder, and 12 other minerals. Important to mention that these minerals are part of the India-US bilateral partnership as envisaged in the Memorandum of Understanding on Critical Minerals signed in October 2024.
- Capital goods for EV battery manufacturing will boost the E-mobility. This is in line with India’s commitment to achieve Net zero emissions by 2070.
Retrospective Amendment for Restricting Input Tax Credit
Earlier, the GST law prescribed restriction of Input Tax Credit (ITC) concerning inputs or input services incurred for the construction of an immovable property (other than plant or machinery). Now, the government has proposed a retrospective amendment that replaces the phrase ‘plant or machinery’ with ‘plant and machinery’.
Consequent to such amendment, the scope of the expenses that may be covered under the said restriction has been widened and will lead to restriction of ITC availability. This also nullifies the impact (to that extent) of the recent decision of the Supreme Court in the case of M/s Safari Retreat, which provided an interpretation of the term ‘plant or machinery’ and distinguished the same from the term and definition provided for ‘plant and machinery’.
Unfinished agenda
The Union Budget introduced various amendments to boost domestic manufacturing, promote exports, and ease compliances, which aim at emphasising the need to show trust in taxpayers and build the economic strength of India. However, there are still various key aspects/sectors which could have been addressed, that would have further provided an impetus in achieving the end objective. A few such items have been mentioned here:
Service exporters have been again overlooked. They are crucial for foreign exchange and economic growth and are facing challenges from the global slowdown, rising competition, and the withdrawal of SEIS in 2022. There is a need for a new scheme to replace SEIS to maintain competitiveness.
While the government has introduced a block of 3 years for the computation of arm’s length price (ALP) in relation to an international transaction under Income Tax, to reduce the compliance burden. An alignment of common norms for determining ALP under Customs and Transfer Pricing related party transactions is a need of the hour, which is yet to be taken up. As there are various contradicting judicial precedents that favor and contradict the use of custom valuation while establishing arm’s length price under transfer pricing.
Further, though as a welcome step, the option for voluntary payment has been introduced under customs even post clearance on a self-assessment basis but the expectation of an amnesty scheme under Customs for past dues, similar to the Legacy Dispute Resolution Scheme introduced in 2019, remains unfulfilled.
This would have helped the industry considerably reduce the baggage of litigations and helped the government in unlocking the tax dues. Also, with the abolishment of the settlement commission under Customs (which is in alignment with the other tax laws as well), it would be interesting to see whether any alternative dispute resolution mechanism is provided to taxpayers post-April 2025.
Overall, the Budget has brought in various taxpayer-friendly amendments and the expectation is that the government also deliberates on the unfinished agenda.
By Anita Rastogi, Subject Matter Expert
