GST Updates in Budget 2025: New ITC Rules, Penalties & More

The Union Budget 2025-26, presented by Finance Minister Smt. Nirmala Sitharaman, introduces several amendments to the Goods and Services Tax (GST) laws. These changes aim to streamline tax compliance, enhance trade facilitation, and improve tax administration. Here are the key takeaways from the proposed amendments:

1. Distribution of Input Tax Credit for Inter-State Supplies

A new provision has been introduced for Input Service Distributors (ISD) to distribute input tax credit (ITC) on inter-state supplies. This is particularly relevant for transactions where tax is paid under the reverse charge mechanism. This amendment will take effect from April 1, 2025 and is expected to improve credit utilization efficiency for businesses.

2. Introduction of Unique Identification Marking for Track and Trace Mechanism

The budget proposes a new clause defining Unique Identification Marking for implementing a Track and Trace Mechanism. This initiative aims to curb tax evasion and enhance transparency in the supply chain.

3. Reversal of ITC for Credit Notes to Reduce Supplier Tax Liability

Suppliers who issue credit notes to buyers will now be required to reverse the corresponding input tax credit availed. This provision ensures that tax liability is adjusted fairly, preventing undue advantages to businesses claiming ITC without corresponding liability adjustments.

4. 10% Pre-Deposit for Appeals in Penalty-Only Cases

For appeals where only penalties are in dispute (without a tax demand), a mandatory pre-deposit of 10% of the penalty amount will be required before approaching the Appellate Authority. This measure is likely to deter frivolous appeals while ensuring smoother dispute resolution.

5. Penalties for Non-Compliance with Track and Trace Mechanism

Non-compliance with provisions related to the Track and Trace Mechanism will attract penalties. This move strengthens enforcement and encourages businesses to adhere to tracking regulations.

6. Clarification on SEZ and Free Trade Warehousing Zone Supplies

A key amendment in Schedule III of the CGST Act, 2017 clarifies that supplies made from a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ) before clearance for export or to the Domestic Tariff Area (DTA) will neither be treated as a supply of goods nor as a supply of services. Additionally, businesses will not be eligible for a refund of taxes already paid on such transactions. This provision is applicable retrospectively from July 1, 2017.

7. Inclusion of Definitions for ‘Local Fund’ and ‘Municipal Fund’

The budget introduces definitions for ‘Local Fund’ and ‘Municipal Fund’ under the term ‘local authority’. This clarification will help in determining tax applicability and compliance for local government bodies.

8. Additional Conditions for Filing Returns

New restrictions and conditions have been proposed for filing GST returns. This step aims to enhance compliance and reduce fraudulent filings.

Implementation Timeline

These changes will be implemented in coordination with State Governments based on recommendations of the GST Council. The specific dates for their enforcement will be notified later.

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Conclusion

The proposed GST amendments in Budget 2025-26 aim to create a more transparent and efficient tax system. Businesses should prepare for these changes, ensuring compliance with the new regulations while leveraging the benefits of streamlined tax credit distribution and tracking mechanisms.

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