Budget 2025 GST Changes: Key Updates & Impact

Highlights

1. ITC Distribution by ISD – ISDs can now distribute ITC on RCM transactions for inter-state supplies (Effective: 1st April 2025).
2. Clarification on Local Authority – Defines Local & Municipal Funds under Section 2(69) for better clarity.
3. Track & Trace Mechanism – Introduces Unique Identification Marking (digital stamps) for certain goods; penalties for non-compliance.
4. Time of Supply for Vouchers Removed – Vouchers taxed based on underlying goods/services, not issuance or redemption.
5. Retrospective ITC Disallowance – ITC denied for plant/building construction expenses from 1st July 2017, overriding past rulings.
6. Credit Note Tax Adjustment Restriction – Supplier can reduce tax liability only if the recipient reverses ITC on the credit note.
7. GSTR-2B Update – No auto-generation; taxpayers must compute ITC manually under IMS initiative.
8. New GSTR-3B Filing Conditions – Government can restrict filing if compliance conditions aren’t met.
9. Mandatory Pre-Deposit for Appeals – 10% pre-deposit required for penalty-only appeals before Appellate Authority & Tribunal.
10. SEZ/FTWZ Supply Not Taxable – Retrospective from 1st July 2017, clarifying warehoused goods in SEZs are not a taxable supply.

ITC Distribution by ISD for Interstate RCM

• As per Finance Act 2024, only Intra state RCM transactions were covered in the ISD definition for distribution by ISD.
• Now, Section 2(61) and Section 20 of CGST Act, 2017 has been redefined to explicitly include the Interstate RCM supplies in ISD credit distribution.
• Reference – Clause 116 & 120 of Finance Bill, 2025.

Clarification on Local Authority

• The terms Local Fund and Municipal Fund has been defined by inserting an explanation to Clause 69 of Section 2 (Local Authority) of CGST Act, 2017 to include funds managed or controlled by local government authorities established for carrying out civic functions related to Municipal and Panchayat areas, respectively.
• “local fund” means any fund under the control or management of an authority of a local self government established for discharging civic functions in relation to a Panchayat area and vested by law with the powers to levy, collect and appropriate any tax, duty, toll, cess or fee, by whatever name called;
• “municipal fund” means any fund under the control or management of an authority of a local self government established for discharging civic functions in relation to a Metropolitan area or Municipal area and vested by law with the powers to levy, collect and appropriate any tax, duty, toll, cess or fee, by whatever name called.;
• This provision shall be applicable from date of enactment of the Bill
• Reference – Clause 116 of Finance Bill, 2025.

Track & Trace Mechanism for Certain Goods

• New Clause 116A has been inserted in Section 2 of CGST Act, 2017 for defining the “unique identification marking”
• “unique identification marking” means the unique identification marking referred to in clause (b) of sub-section (2) of section 148A and includes a digital stamp, digital mark or any other similar marking, which is unique, secure and non-removable;’;
• New Section 148A has been introduced to track and trace mechanism for certain goods and the person / class of persons who are in possession of such goods which enables to electronic storage and access of prescribed information.
• Section 148A : Track & Trace Mechanism for Certain Goods
  • (1) The Government may, on the recommendations of the Council, by notification, specify,–
    • (a) the goods;
    • (b) persons or class of persons who are in possession or deal with such goods,
    • to which the provisions of this section shall apply.
  • (2) The Government may, in respect of the goods referred to in clause (a) of sub-section (1),––
    • (a) provide a system for enabling affixation of unique identification marking and for electronic storage and access of information contained therein, through such persons, as may be prescribed; and
    • (b) prescribe the unique identification marking for such goods, including the information to be recorded therein.
  • (3) The persons referred to in sub-section (1), shall,––
    • (a) affix on the said goods or packages thereof, a unique identification marking, containing such information and in such manner;
    • (b) furnish such information and details within such time and maintain such records or documents, in such form and manner;
    • (c) furnish details of the machinery installed in the place of business of manufacture of such goods, including the identification, capacity, duration of operation and such other details or information, within such time and in such form and manner;
    • (d) pay such amount in relation to the system referred to in sub-section (2), as may be prescribed.”.
• The Section 122B has been inserted to include the Penal Provisions for Contravention of Section 148A
• Section 122B : Penalty for failure to comply with track and trace mechanism
  • Notwithstanding anything contained in this Act, where any person referred to in clause (b) of sub-section (1) of section 148A acts in contravention of the provisions of the said section, he shall, in addition to any penalty under Chapter XV or the provisions of this Chapter, be liable to pay a penalty equal to an amount of one lakh rupees or ten per cent. of the tax payable on such goods, whichever is higher.”.
• Reference – Clause 116, 126 and 127 of Finance Bill, 2025.

Time of Supply for Vouchers

• Circular No. 243/37/2024-GST, dated 31st December 2024, clarified that vouchers are not inherently taxable; instead, the underlying goods or services are subject to GST.
• The time of supply provisions in Section 12 & 13 have been amended to remove the special clause, Subsection (4) of Section 12 & 13 related to the supply of vouchers.
• The underlying goods or services will now be taxed based on the standard time of supply provisions outlined in Section 12 or 13 of the CGST Act, 2017.
• Reference – Clause 117 & 118 of Finance Bill, 2025.

Retrospective ITC Disallowance under Section 17(5)(d)

• The Section 17(5)(d) disallows the ITC on immovable property other than Plant or Machinery
• In the case of Safari Retreats, the Apex Court differentiated between the terms Plant or Machinery and Plant and Machinery. It also allowed Input Tax Credit (ITC) on goods and services used for the construction of Plant or Machinery.
• To override this judgment, the Government has introduced a retrospective amendment effective from 1st July 2017. Under this amendment, the term is now interpreted as Plant and Machinery, thereby disallowing ITC on goods and services used for the construction of land and buildings from the same date.
• An Explanation has been inserted after Explanation for Section 17(5)(d) for the Retrospective implemention.
• Reference – Clause 119 of Finance Bill, 2025.

Credit Note Tax Adjustment Section 34(2)

• A new proviso to section 34(2) has been inserted to restrict the reduction of Outward Tax Liability if following conditions are not met
  • (i) input tax credit as is attributable to such a credit note, if availed, has not been reversed by the recipient, where such recipient is a registered person; or
  • (ii) incidence of tax on such supply has been passed on to any other person, in other cases.
• Reference – Clause 121 of Finance Bill, 2025.

Auto Generated GSTR 2B – Section 38

• The amendment to Section 38(1) removes the term “auto-generated” from the reference to the input tax credit statement in GSTR-2B.
• As part of the IMS initiative, taxpayers will now be responsible for regenerating and re-computing GSTR-2B.
• Reference – Clause 122 of Finance Bill, 2025.

New GSTR-3B Filing Conditions

• The GSTR 3B filing can be Restricted if the conditions aren’t met.
• Reference – Clause 123 of Finance Bill, 2025.

Pre-Deposit for Penalty-Only Orders

• A 10% pre-deposit is now required under Sections 107(6) and 112(8).
• This applies to cases where the order imposes only a penalty and not a tax liability.
• Reference – Clause 124 & 125 of Finance Bill, 2025.

Amendment of Schedule III – No Supply

• 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 is neither Supply of Goods nor supply of services
• This is applicable retrospectively from 1^st July 2017
• 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
• Reference – Clause 128 & 129 of Finance Bill, 2025.

With these updates, the government aims to streamline tax administration and enhance clarity in GST provisions. Businesses should review these changes carefully to align with the new regulatory framework.”