Trade Facilitation in Focus: GST Amendments Proposed in Budget 2025-26

The Union Budget 2025-26, presented by the Union Minister for Finance and Corporate Affairs, Smt Nirmala Sitharaman, outlines several key amendments to the Goods and Services Tax (GST) laws. These changes aim to streamline trade processes, enhance compliance, and introduce new provisions related to taxation and penalties. Here is an overview of the major proposals.

1. Distribution of Input Tax Credit (ITC) for Reverse Charge Transactions

One of the notable amendments pertains to the Input Service Distributor (ISD). From April 1, 2025, input tax credit distribution will be allowed for inter-state supplies where tax is paid on a reverse charge basis. This measure is expected to provide greater clarity and facilitate better credit utilisation for businesses.

2. Unique Identification Marking for Track and Trace Mechanism

A new clause has been introduced to define Unique Identification Marking as part of the Track and Trace Mechanism. This will likely help in improving transparency and monitoring within the GST framework, ensuring better compliance across industries.

3. Reversal of Input Tax Credit for Credit Notes

To prevent unwarranted claims, the amendment mandates that businesses must reverse corresponding input tax credit (ITC) if they avail a credit note to reduce the supplier’s tax liability. This move ensures that tax benefits align accurately with actual transactions.

4. Mandatory Pre-Deposit for Penalty Appeals

For cases where only penalty amounts are in dispute (without any tax demand), taxpayers will be required to make a mandatory pre-deposit of 10% of the penalty amount before filing an appeal with the Appellate Authority. This aims to reduce frivolous litigation and expedite the resolution process.

5. Penalties for Track and Trace Non-Compliance

The budget also proposes penalties for businesses that violate provisions related to the Track and Trace Mechanism. This ensures stricter enforcement and discourages malpractices in supply chain tracking.

6. Taxation of SEZ and FTWZ Transactions

A crucial clarification has been made regarding transactions involving Special Economic Zones (SEZs) and Free Trade Warehousing Zones (FTWZs). The supply of goods warehoused in these zones to any person before clearance for export or to the Domestic Tariff Area (DTA) will not be considered as a supply of goods or services. Additionally, no tax refund will be granted for such transactions, with retrospective effect from July 1, 2017.

7. Defining ‘Local Fund’ and ‘Municipal Fund’

To bring more clarity, the definitions of ‘Local Fund’ and ‘Municipal Fund’ have been formally included in the definition of ‘local authority’. This change will likely impact tax exemptions and liabilities of various local bodies.

8. Conditions and Restrictions for Filing GST Returns

The Budget also proposes introducing certain conditions and restrictions for filing GST returns. While the specifics are yet to be notified, these changes will be implemented based on recommendations of the GST Council, in coordination with the States.

Implementation Timeline

Most of these amendments will come into effect on a date to be notified, ensuring adequate preparation time for businesses. The changes are designed to improve trade facilitation, compliance, and enforcement within the GST framework.

As these proposals move towards implementation, businesses should stay updated on notifications and guidelines issued by the GST Council to ensure smooth compliance with the new regulations.

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