The article “GST Budget Update 2025: Clause By Clause Analysis” is written by CA L. Gopal Shah, FCA, LL.B & M.Com who is a Partner firm Komandoor & Co LLP, Bhubaneswar Orissa. You may contact him at 9437124361 and mail him at ca.lgshah@gmail.com.
Table of Contents
The Finance Bill, 2025 proposes the following amendments in GST law:
1. Inserted Definition of Input Service Distributor
Proposed Amendment
Clause 116 of the Finance Bill proposes a change to the definition of “Input Service Distributor” (ISD) under the Central Goods and Services Tax (CGST) Act.
Microsoft Word – Final Finance Bill, 2025
Clause 120 of the Bill seeks to amend sub-section (1) of section 20 of the Central Goods and Services Tax Act so as to explicitly provide for distribution of input tax credit by the Input Service Distributor in respect of inter-State supplies, on which tax has to be paid on reverse charge basis, by inserting a reference to sub-section (3) and sub-section (4) of section 5 of the Integrated Goods and Services Tax Act in the said sub-section.
The amendment will allow ISDs to distribute input tax credit (ITC) for inter-state supplies where tax is paid under the reverse charge mechanism. This is done by adding references to Section 5(3) and 5(4) of the Integrated GST (IGST) Act in the ISD definition.
Effective Date
This change will be effective from April 1, 2025.
Existing Provision
There was confusion about whether an Input Service Distributor (ISD) could pass on the Input Tax Credit (ITC) for tax paid under the Reverse Charge Mechanism (RCM).
Analysis
The provisions relating to ISD underwent major amendments through the Finance Act, 2024, to be implemented from April 1, 2025. One of the key changes was that ISD can distribute ITC of GST paid under reverse charge by a distinct person in terms of Section 9(3) and 9(4) of the CGST Act. The said distribution is to be affected in the manner prescribed under Rule 39 of the CGST Rules.
The proposed amendment to ISD provisions vide Finance Act, 2024 only covered GST paid under reverse charge in terms of Section 9(3) and 9(4) of the CGST Act. However, with the proposed amendment vide Finance Bill, 2025, the Government has now included distribution of ITC by the ISD in respect of GST paid under reverse charge on inter-state supplies i.e. GST paid under Section 5(3) and 5(4) of the IGST Act. With this change, the possibility of interpretational dispute, if any, is duly addressed.
With the amendment, ISDs can now legally distribute ITC on RCM tax paid for input services to their branches. This helps businesses use their tax credits more efficiently. The law now clearly allows this under CGST Sections 9(3) & 9(4) and IGST Sections 5(3) & 5(4).
2. Replace “municipal or local fund” with “municipal fund or local fund”
Proposed Amendment
Clause 117 of the Bill seeks to omit sub-section (4) of section 12 of the Central Goods and Services Tax Act so as to remove the provision for time of supply in respect of transaction in vouchers, the same being neither supply of goods nor supply of services.
Existing Provision
Section 2(69) defined “local authority” which includes a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to or entrusted by the CG or any SG with the control or management of a municipal or local fund.
Analysis
Section 2(69) of the CGST Act defines the term ‘local authority’. The definition is relevant in determining applicable GST rates, availability of exemptions, responsibility to pay GST under RCM for specified supplies.
Clause (c) of the definition suggests that the expression local authority would inter alia mean a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund.
Section 2 (69) is proposed to be amended to replace the expression ‘municipal or local fund’ with ‘municipal fund or local fund’, and also to insert the definition of the terms ‘local fund’ and ‘municipal fund’ for the purpose of Section 2(69).
3. “Track And Trace” Mechanism To Check GST Evasion
Proposed Amendment
It was proposed to insert a new clause (116A) in section 2 so as to define the expression “unique identification marking” to mean a mark that is unique, secure and non-removable, for implementation of track and trace mechanism.
Clause 126 of the Bill seeks to insert a new section 122B in the Central Goods and Services Tax Act to provide for penal provisions for contraventions of the provision relating to track and trace mechanism.
Clause 127 of the Bill seeks to insert a new section 148A in the Central Goods and Services Tax Act so as to provide for an enabling provision for implementation of track and trace mechanism for ensuring effective monitoring and control of supply of specified commodities.
Penalty for failure to comply with track and trace mechanism
Clause 126 of the Bill seeks to insert a new section 122B in the Central Goods and Services Tax Act to provide for penal provisions for contraventions of the provision relating to track and trace mechanism.
Clause 127 of the Bill seeks to insert a new section 148A in the Central Goods and Services Tax Act so as to provide for an enabling provision for implementation of track and trace mechanism for ensuring effective monitoring and control of supply of specified commodities.
Clause 127 of the Bill seeks to insert a new section 148A in the Central Goods and Services Tax Act, relating to track and trace mechanism for certain goods. Sub-section (2) of the said section 148A seeks to empower the Government to provide by rules a system for enabling affixation of unique identification marking and for electronic storage and access of information and the person through whom such system may be provided. It further seeks to empower the Government to provide by rules the Unique Identification marking for goods including the information to be recorded therein.
Sub-section (3) of the said section 148A seeks to empower the Government to provide by rules, the information to be contained in, and the manner of affixing on the goods and packages a unique identification marking under clause (a), the form and manner and the time for furnishing information and details and maintaining records or documents under clause (b), the time within which and the form and manner in which other details shall be furnished under clause (c) and the amount to be paid under clause (d) of the said sub-section.
Existing Provision
Presently, there is no “track and trace” mechanism to put a check on evasion prone commodities including Cigarettes and Pan Masala.
Analysis
The track and trace mechanism for tobacco products has already been envisaged/implemented in other jurisdictions, with objectives going beyond mere securing tax revenues. For example, the EU Tobacco Products Directive (2014/40/EU) provides for the establishment of an EU-wide track and trace system for the legal supply chain of tobacco products along with a system of security features to help detect illicit products.
It is noteworthy that India acceded to the Protocol under WHO’s Framework Convention on tobacco control to eliminate illicit trade in tobacco products and is a party to the WHO Framework Convention on Tobacco Control (FCTC). The obligations of the parties identified under the said protocol include taking supply chain control measures such as a tracking and tracing regime for tobacco products.
Tracking and tracing of supply chain for tobacco products including cigarettes is thus a larger step to curb illicit trade in such products and has a far-reaching impact on public health, simultaneously addressing the issue of tax evasion as well.
4. Omission of Section 12(4) and 13(4) which stipulate the Time of Supply for Vouchers
Proposed Amendment
Clause 117 of the Bill seeks to omit sub-section (4) of section 12 of the Central Goods and Services Tax Act so as to remove the provision for time of supply in respect of transaction in vouchers, the same being neither supply of goods nor supply of services.
Clause 118 of the Bill seeks to omit sub-section (4) of section 13 of the Central Goods and Services Tax Act so as to remove the provision for time of supply in respect of transaction in vouchers, the same being neither supply of goods nor supply of services.
Analysis
In the case of Premier Sales Promotion Pvt Limited Vs. UOI, Karnataka High Court inter alia held that vouchers do not fall under the category of goods or services and therefore cannot be subjected to GST. The proposed amendment is in line with the said decision of the Hon’ble Karnataka High Court and the recent Circular 243/37/2024-GST dated December 31, 2024, both holding non-applicability of tax on vouchers, consequently there being no need for determination of time of supply thereof.
5. Retrospective amendment to Section 17(5)(d)
Proposed Amendment
Clause 119 of the Bill seeks to amend clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act so as to substitute the expression “plant or machinery” with the expression “plant and machinery” to remove any ambiguity in interpretation for the purpose of availment of input tax credit in such cases.
It further seeks to insert an Explanation to clarify that the said amendment is made notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority.
Effective Date
This amendment shall take effect retrospectively from 1st day of July, 2017.
Existing Provision
The expression “plant or machinery” appears only in clause (d) of Section 17(5). The use of the word “or” in clause (d) is a mistake of the legislature.
Analysis
The Finance Bill, 2025 has reversed the decision of Supreme Court in the case of Safari Retreats Case by amending a clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act.
Clause 119 of the Finance Bill, 2025 seeks to amend clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act so as to substitute the expression “plant or machinery with the expression “plant and machinery” to remove any ambiguity in interpretation for the purpose of availment of input tax credit in such cases.
The real estate sector is set to face a significant impact from this change. Developers constructing commercial properties for lease will no longer be eligible to claim Input Tax Credit (ITC) on construction-related expenses. This opens a door for litigation and the validity of retrospective amendment may be questioned in the court of law.
6. Insertion of proviso to Section 34(2) which provides for issuance of credit notes
Proposed Amendment
Clause 121 of the Bill seeks to amend the proviso to sub-section (2) of section 34 of the Central Goods and Services Tax Act so as to explicitly provide for the requirement of reversal of corresponding input tax credit in respect of a credit-note, if availed, by the registered recipient, for the purpose of reduction of tax liability of the supplier in respect of the said credit note.
It further seeks to remove the condition in the said proviso of not having passed the incidence of interest on supply for the purpose of reduction of tax liability of the supplier in respect of the said credit note.
Analysis
The proposed amendment to Section 34 aims to tighten ITC claims, ensuring they reflect actual transactions. While this move strengthens tax compliance and curbs revenue leakage, it also introduces operational challenges for recipients.
Key Issues & Compliance Burden
- Burden on Recipients: Businesses must closely track suppliers’ credit notes and adjust ITC accordingly, increasing compliance costs.
- Lack of Real-time Visibility: No automated mechanism exists for suppliers to verify whether recipients have reversed ITC, creating reconciliation gaps.
- Potential Disputes & Litigation: Errors or mismatches in ITC reversal may trigger tax demands, interest, and penalties, leading to additional litigation.
Possible Solutions
- System Integration: A GSTN-enabled validation system where suppliers can check ITC reversals.
- Standardized Reconciliation Process: Mandating suppliers to report credit notes under GSTR-1 while allowing recipients to confirm adjustments in GSTR-3B.
- Grace Period for ITC Reversal: Allowing a reasonable time frame to mitigate inadvertent non-compliance.
This amendment reinforces invoice-level accuracy but needs additional clarity and system enhancements to reduce compliance friction and legal risks.
7. Statement of Input Tax Credit to be Aligned with Invoice Management System (IMS)
Proposed Amendment
Clause 122 of the Bill seeks to amend sub-section (1) of section 38 of the Central Goods and Services Tax Act to omit the expression “auto-generated” with respect to statement of input tax credit in the said sub-section.
It further seeks to amend sub-section (2) of the said section by omitting the expression “auto-generated” with respect to statement of input tax credit in the said sub- section and inserting the expression “including” after the words “by the recipient” in clause (b) of said sub-section so as to make the said sub-section inclusive to cover other cases where input tax credit is not available to taxpayer under any other provisions of the Act.
It further inserts a new clause (c) in the said sub-section to provide for an enabling clause to prescribe other details to be made available in the statement of input tax credit.
Existing Provision
GSTR-2B was previously auto-generated based on supplier data in GSTR-1, restricting the recipient’s ability to modify or validate input tax credit (ITC). With the introduction of the Invoice Management System (IMS), recipient taxpayers can now accept, reject, or reconcile ITC in real-time, enhancing transparency and control.
Analysis
To align GST law with this operational shift, amendments have been proposed:
- Section 38 of the CGST Act will replace the term “auto-generated statement” with “a statement,” reflecting the dynamic nature of ITC reconciliation under IMS.
- Section 39(1) will be revised to introduce conditions and restrictions for return filing.
- Section 34(2) will now mandate ITC reversal corresponding to credit notes, ensuring that suppliers can adjust their output tax liability accordingly.
These changes aim to streamline ITC claims, minimize mismatches, and reduce compliance challenges.
8. Conditions and restrictions for filing of return
Proposed Amendment
Clause 123 of the Bill seeks to amend sub-section (1) of section 39 of the Central Goods and Services Tax Act so as to provide for an enabling clause to prescribe conditions and restriction for filing of return under the said sub-section.
Existing Provision
Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 shall, for every calendar month or part thereof, furnish, a return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars, in such form and manner, and within such time, as may be prescribed.
Analysis
UNION BUDGET 2018 – 19
Section 39(1) is being amended so as to provide for an enabling clause to prescribe conditions and restriction for filing of return in GSTR-3B under the said sub-section.
9. Amendment to Section 107(6): Reduction In Pre-Deposit
Proposed Amendment
Clause 124 of the Bill seeks to substitute the proviso to sub-section (6) of section 107 of the Central Goods and Services Tax Act to provide for the requirement of pre-deposit of ten per cent. of the penalty amount for filing an appeal before the Appellate Authority against an order which involves demand of penalty without involving any demand of tax.
Clause 125 of the Bill seeks to insert a proviso to sub-section (8) of section 112 of Central Goods and Services Tax Act to provide for the requirement of pre-deposit of ten per cent. of the penalty amount for filing an appeal before the Appellate Tribunal against an order which involves demand of penalty without involving any demand of tax.
Existing Provision
Under the current appeal process, if an appeal was filed against an order related to an E-way bill, taxpayers were required to pre-deposit 25% of the penalty imposed in the order. However, following the amendment, this requirement has been reduced to 10%, easing the financial burden for appellants.
Analysis
The introduction of a mandatory 10% pre-deposit for penalty-related appeals is intended to deter frivolous litigationand streamline the appellate process. While this move may help reduce the workload of appellate authorities, it also places a financial strain on businesses, especially small and medium enterprises (SMEs), who may face challenges in seeking legitimate redressal.
10. Retrospective Amendment To Schedule III is being amended, w.e.f. 01.7.2017
Proposed Amendment
Clause 128 of the Bill seeks to insert a new clause (aa) in paragraph 8 of Schedule III of the Central Goods and Services Tax Act to specify that the supply of goods warehoused in a Special Economic Zone or in a Free Trade Warehousing Zone to any person before clearance for exports or to the Domestic Tariff Area shall be treated neither as supply of goods nor as supply of services.
It further seeks to amend the Explanation 2 of the said Schedule to clarify that the said Explanation shall be applicable in respect of clause (a) of paragraph 8 of the said Schedule.
It also seeks to insert an Explanation 3 in the said Schedule to define the expressions “Special Economic Zone”, “Free Trade Warehousing Zone” and “Domestic Tariff Area”, for the purpose of the proposed clause (aa) in paragraph 8 of said Schedule.
A provision in Schedule III of the CGST Act, 2017 stating that the supply of goods warehoused in a Special Economic Zone or in a Free Trade Warehousing Zone to any person before clearance for exports or to the Domestic Tariff Area shall be treated neither as a supply of goods nor as a supply of services. Also, no refund of tax already paid will be available for such transactions.
Schedule III is being amended, w.e.f. 01.7.2017 to:₋
Insert a new Entry (aa) in paragraph 8 to provide that the supply of goods warehoused in a Special Economic Zone or in a Free Trade Warehousing Zone to any person before clearance for exports or to the Domestic Tariff Area shall be treated neither as supply of goods nor as supply of services. Amend Explanation 2, w.e.f. 01.07.2017 to clarify that the said explanation would be applicable in respect of entry (a) of paragraph 8.
Insert Explanation 3 to define the terms ‘Special Economic Zone’, ‘Free Trade Warehousing Zone’, and ‘Domestic Tariff Area’, for the purpose of the proposed entry (aa) in paragraph 8.
To provide that no refund of tax already paid will be available for the transactions.
Effective Date
This will be applicable with effect from 01.7.2017.
Existing Provision
In terms of Entry 8. (a) to Schedule III of CGST Act provides that Supply of warehoused goods (Covered under Customs Law) to any person before clearance for home consumption would be treated neither as supply of goods nor as supply of services.
However, there was a dilemma whether transactions from Free Trade Warehouse Zone (FTWZ) [covered under SEZ Act] to any person before clearance for home consumption would be taxable or classified as a schedule III item?
Analysis
To insert clause (aa) in paragraph 8 of Schedule III of the CGST Act, 2017 w.e.f.01.07.2017, to explicitly provide that supply of goods warehoused in a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ) to any person before clearance of such goods for exports or to the Domestic Tariff Area, shall be treated neither as supply of goods nor as supply of services.
This is a welcoming insertion as it provides relief to the SEZ Units and SEZ Developers from the ambit of GST compliance. Any entities who have paid tax in the past for such transactions and borne the tax incidence may look at refund possibilities (irrespective of the 2 year timeline).
11. Clarification as to Non-refund of Already paid tax
Clause 129 of the Bill seeks to clarify that no refund of the tax, already paid in respect of the aforesaid activities or transactions, shall be available.
No refund shall be made of all such tax which has been collected, but which would not have been so collected, had section 128 been in force at all material times.
