Union Budget 2025: Key Reforms expected in the Indirect Tax System

As Finance Minister Nirmala Sitharaman prepares to present her second Union Budget of the current term, both businesses and citizens have high expectations. The Union Budget 2025 comes at a critical point in India’s economic trajectory, with the focus remaining on accelerating growth, improving efficiency, and increasing transparency.

The implementation of an amnesty scheme to resolve unresolved Customs litigation has long been a desire of the sector. While the government has previously launched similar schemes for former indirect taxes (Sab ka Vishwas) and GST (Section 128A), an amnesty scheme for Customs has yet to be finalized and is thus eagerly anticipated. Also, it is critical that the scheme, if announced, comes up with conditions that ensure maximum participation and coverage.

Aligned with the key initiatives of Government of ‘Make in India’ and ‘Aatmanirbhar Bharat’, the Union Budget 2025 is expected to announce restructuring of import duties on raw materials, inputs, and capital goods. The primary goal of the announcements could be to stimulate the production of final products and machines under the Phased Manufacturing Plan (PMP) declared for a variety of products such as wrist watches, electric automobiles, medical X-Ray machines, hearing aids, and so on.

Another serious issue that needs attention relates to the protracted Special Valuation Branch (SVB) investigations for related-party transactions. Introducing a time-bound method that results in the prompt completion of all provisional evaluations can significantly simplify related party imports.

Furthermore, the Central Board of Indirect Taxes (CBIC) has taken steps to digitize compliance, such as faceless assessment and an electronic credit ledger for Customs duty payment, in order to promote ease of doing business. These measures are expected to be repeated in the upcoming Budget to streamline cargo clearance processes and improve trade facilitation.

GST has undergone substantial changes over the previous eight years, resulting in increased tax revenue for both the Union and the states. However, the Indian GST tariff has a multi-rate structure, with rates of 0%, 5%, 12%, 18%, and 28%, as well as two additional special rates (0.25% and 3%), and a cess (1-15%) on demerit and luxury products. As a result, there is an anticipation of rate structure rationalization, which includes reducing the number of rates, eliminating rate inversions, and introducing broad-band rates for comparable products.

Another important expectation for GST has been the inclusion of petroleum products, natural gas and electricity under the tax scope. Including these sectors in the tax net could reduce tax cascading, lower production costs, and reduce the overall revenue neutral rate under GST. Any mention of goal dates or the government’s perspective on how to persuade states to include these industries, similar to tax rate rationalization, would be a beneficial move.

Furthermore, the government is expected to announce a retrospective amendment to Section 17(5)(d) of the CGST Act, 2017, replacing the phrase “plant or machinery” with “plant and machinery.” This move follows the Supreme Court’s decision in the M/s Safari Retreats case, which fuelled the debate over what qualifies as plant or machinery and thus eligible for credit. The proposed retrospective revision may appear to be a setback for the real estate industry, potentially resulting to higher costs for previous transactions. Thus, the industry would expect the government to provide a clear and equitable solution.

Following the success of faceless assessments in direct taxes, the development of a path to faceless communication for GST refunds, departmental audits, notices, and so on is another expectation mentioned in key industry associations’ pre-budget memorandum.

By decreasing Customs disputes through an amnesty scheme, simplifying imports through reforms to the SVB procedure, and rationalizing Customs duty rates to stimulate domestic manufacturing, the Budget can offer the essential support to India Inc while promoting a more business-friendly environment. On GST, while the Union Budget’s role in direct policymaking has shifted, its ability to usher in revolutionary reforms that point the way to a simpler system remains critical.