Union Budget: Analysis of changes in Goods & Service Tax

The Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman presented the Union Budget 2024-25 in Parliament, today i.e. February 02, 2025.  Majorly the changes were earlier recommended by the GST Council in its 55th GST Council Meeting held on 21.12.2024. The key highlights of the proposed changes under GST Law are as follows:

A. Changes to bring interstate transactions under reverse charge mechanism (RCM) within the ambit of ISD mechanism:

The Finance Act 2024 amended the definition of an Input Service Distributor (ISD) under Section 2(61) and substituted Section 20 of the CGST Act with a new provision to clarify the scope of ISD. The amendments make it mandatory for the taxpayers to distribute common Input Tax Credit (ITC) via ISD and prescribe a detailed procedure for distributing ITC, including ITC on Reverse Charge Mechanism (RCM). However, the amendments did not provide clarity or corresponding changes regarding the distribution of ITC for taxes paid under RCM on interstate transactions.

Following changes are introduced via Finance Act 2025 to align the ISD provisions with IGST law and to include interstate Reverse Charge Mechanism (RCM) transactions under ISD:

1.Amendment in clause (61)-Definition of ISD:

“116.After the word and figure “section 9”, the words, brackets and figures “of this Act or under sub section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017” shall be inserted with effect from the 1st day of April 2025.”

 Remark: To explicitly include interstate Reverse Charge Mechanism (RCM) transactions under ISD, reference of section 5(3) and 5(4) of IGST Act, 2017 has been included in definition of ISD under clause (61) of CGST Act 2017. The amendment will be effective from 1st April 2025.

2.Amendment in Section (20) – Manner of distribution of credit under ISD:

“120.In section 20 of the Central Goods and Services Tax Act, with effect from the 1st day of April 2025–– in sub-section (1), after the word and figure “section 9”, the words, brackets and figures “of this Act or under sub section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017” shall be inserted;

(ii) in sub-section (2), after the word and figure “section 9”, the words, brackets and figures “of this Act or under sub section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017,” shall be inserted.”

Remark: To explicitly include interstate Reverse Charge Mechanism (RCM) transactions under ISD, reference of section 5(3) and 5(4) of IGST Act, 2017 has been included in the Sec 20 (1) and Sec 20(2) of CGST Act 2017. The amendment will be effective from 1st April 2025.

B. Omission of Certain Provisions from the CGST Act 2017 relating to Vouchers:

“117.In section 12 of the Central Goods and Services Tax Act, sub-section (4) shall be omitted.

 118.In section 13 of the Central Goods and Services Tax Act, sub-section (4) shall be omitted.

Remark: In a significant move to address long-standing concerns regarding the taxability of vouchers under GST, the GST Council at their 55^th meeting clarified that no GST is applicable on transaction of vouchers as they are neither supply of goods nor supply of services and recommended to omit sections 12(4) and 13(4) from CGST Act, 2017 and rule 32(6) from CGST Rules, 2017 to resolve ambiguities in the treatment of vouchers. In pursuance to such recommendations, Sub-section (4) of Section 12 and Sub-section (4) of Section 13 relating to time of supply in respect of Vouchers is being deleted.  

C. Amendment in Clause (d) of Sec 17(5) to replace phrase “plant or machinery” with “plant and machinery”, retrospectively, with effect from 1 July 2017 to negate the decision of Apex Court in the Case of “Safari Retreats”.

“119. In section 17 of the Central Goods and Services Tax Act, in sub-section (5), in clause (d)––

for the words “plant or machinery”, the words “plant and machinery” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July 2017.

(ii) the Explanation shall be numbered as Explanation 1 thereof, and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely: ––

‘Explanation 2––For the purposes of clause (d), it is hereby clarified that notwithstanding anything to the contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to “plant or machinery” shall be construed and shall always be deemed to have been construed as a reference to “plant and machinery”.

Remark: Recently in the case of Safari retreats (P) Ltd. Vs UOI, The Apex Courts’ pathbreaking decision not only upholds the validity of Section 17(5)(c) and (d) of the CGST Act but also enunciates the “functionality test” to determine whether a building, mall or warehouse, plays the role of a ‘plant’ in the business of the assessee and accordingly could be considered for input tax credit (ITC). The Court has distinguished the phrase “plant or machinery” used in section 17(5)(d) vis-a-vis “plant and machinery” defined in Explanation to Section 17 and held that even a ‘building’ could be considered as ‘plant’, having regard to the business of the assessee and the role that the building plays therein i.e. according to their functionality test. In conclusion, while the Safari Retreats judgment provides a glimmer of hope for taxpayers seeking relief under sec 17(5), the legislature seems not intended to cater the benefit of this judgement and brought amendment in the section 17(5) retrospectively against generalizing the benefit.

D. Amendment in CGST Act to provide legal backing to functionality of Invoice Management System (IMS):

121. In section 34 of the Central Goods and Services Tax Act, in sub-section (2), for the proviso, the following proviso shall be substituted, namely: ––

“Provided that no reduction in output tax liability of the supplier shall be permitted, if the––

(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.”.

122. In section 38 of the Central Goods and Services Tax Act, ––

(i) in sub-section (1), for the words “an auto-generated statement”, the words “a statement” shall be substituted;

(ii) in sub-section (2), ––

(a) for the words “auto-generated statement under”, the words “statement referred in” shall be substituted;

(b) in clause (a), the word “and” shall be omitted;

(c) in clause (b), after the words “by the recipient,”, the word “including” shall be inserted;

(d) after clause (b), the following clause shall be inserted, namely: ––

“(c) such other details as may be prescribed.”

123. In section 39 of the Central Goods and Services Tax Act, in sub-section (1), for the words “and within such time”, the words “within such time, and subject to such conditions and restrictions” shall be substituted.

Remark:  to provide a legal framework in respect of generation of FORM GSTR-2B based on the action taken by the taxpayers on the Invoice Management System (IMS), following changes made:

Section 34(2) of CGST Act, 2017 amended, to specifically provide for requirement of reversal of input tax credit as is attributable to a credit note, by the recipient, to enable the reduction of output tax liability of the supplier.

Reduction will not be allowed if:

• Input Tax Credit (ITC) is not reversed by the recipient: If the recipient (buyer) has already claimed ITC on the original invoice and hasn’t reversed that ITC after receiving the credit note, the supplier cannot reduce their output tax liability.
• (ii)Incidence of tax has been passed on to another party (in other cases): If the tax burden has already been shifted to a third party (e.g., a consumer), the supplier cannot claim a reduction in their tax liability.

 GST Council recommended to amend Sec 38 of CGST Act, 2017 to provide a legal framework in respect of generation of FORM GSTR-2B based on the action taken by the taxpayers on the Invoice Management System (IMS). Section 38(1) is being amended to omit the expression “auto generated” with respect to statement of input tax credit in the said sub section.

Section 38(2) is being amended by omitting the expression “auto generated” with respect to statement of input tax credit in said sub section and also to insert the expression “including” after the words “by the recipient” in clause (b) of said sub-section to make the said clause more inclusive and a new clause (c) is further inserted in the said sub-section to provide for an enabling clause to prescribe other details to be made available in statement of input tax credit.

GST Council recommended to amend Sec 39 of CGST Act, 2017 to provide that FORM GSTR-3B of a tax period shall be allowed to be filed only after FORM GSTR-2B of the said tax period is made available on the portal. Now, amendment is brought to provide for an enabling clause to prescribe conditions and restriction for filing of return under the said sub-section.

 E. Insertion of provisions in related to track and trace mechanism for certain goods.

 1. Insertion of New Section 148A – Track and trace mechanism for certain goods:

127. After section 148 of the Central Goods and Services Act, the following section shall be inserted, namely:––

“148A. (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), track and trace mechanism. Insertion of new section 148A. Track and trace mechanism for certain goods. 69 as may be prescribed.”.

Remark:  Earlier, the GST Council in 55^th meeting took a significant move to plug leakage had approved a proposal to implement ‘Track and Trace Mechanism’ for specified evasion-prone commodities (like cigarettes and pan masala etc.), under which a unique mark will be affixed on such goods or packages to trace them throughout the supply chain. The introduction of the Track and Trace Mechanism through this newly inserted section will help authorities monitor and trace goods throughout the supply chain, significantly reducing the possibility of tax evasion, under-invoicing, or other fraudulent activities.

2. Insertion of new Section 122B – Penalty for failure to comply with track and trace mechanism:

126.After section 122A of the Central Goods and Services Act, the following section shall be inserted, namely: ―

“122B. 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.”.

Remark:  The person violating Section 148A (newly insertion section to this finance Bill) will be liable for an additional penalty, which shall be higher between the following:

• ₹1,00,000 (a fixed amount).
• 10% of the tax payable on such goods.

This penalty is in addition to any other penalties already specified under Chapter XV.

F. Amendment in section 107 and section 112 of CGST Act, 2017 to provide for payment of pre-deposit for filing an appeal in respect of an order passed which involves only penalty amount.

124. In section 107 of the Central Goods and Services Act, in sub-section (6), for the proviso, the following proviso shall be substituted, namely: ––

“Provided that in case of any order demanding penalty without involving demand of any tax, no appeal shall be filed against such order unless a sum equal to ten per cent. of the said penalty has been paid by the appellant.”

125. In section 112 of the Central Goods and Services Act, in sub-section (8), the following proviso shall be inserted, namely: ––

“Provided that in case of any order demanding penalty without involving demand of any tax, no appeal shall be filed against such order unless a sum equal to ten per cent. of the said penalty, in addition to the amount payable under the proviso to sub-section (6) of section 107 has been paid by the appellant.”

Remark:  Sec 107 of CGST Act 2017, is being amended to reduce the amount of pre-deposit for filing of appeals before Appellate Authority for cases where the dispute is only regarding penalties and not the actual tax demand. The pre-deposit quantum to be reduced to 10% of the penalty amount from current 25% of the penalty amount.

 Further, Insertion of new proviso to section 112(8) of CGST Act, 2017 providing for payment of pre-deposit at 10% for filing appeals before Appellate Tribunal in cases involving only demand of penalty without involving the demand of tax.

G. Amendment in Schedule III of CGST Act, 2017.

128.In Schedule III of the Central Goods and Services Act,––

(i) in paragraph 8, after clause (a), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of July, 2017, namely: ––

“(aa) 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;”.

(ii) in Explanation 2, after the words “For the purposes of”, the words, brackets and letter “clause (a) of” shall be inserted and shall be deemed to have been inserted with effect from the 1st day of July, 2017;

(iii) after Explanation 2, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of July, 2017, namely: ––

“Explanation 3. –– For the purposes of clause (aa) of paragraph 8, the expressions “Special Economic Zone”, “Free Trade Warehousing Zone” and “Domestic Tariff Area” shall have the same meanings respectively as assigned to them in section 2 of the Special Economic Zones Act, 2005.”

129. 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.

Remark:  To provide Transactions involving goods warehoused in an SEZ or FTWZ (Free Trade Warehousing Zone) before their clearance for exports or to the Domestic Tariff Area (DTA) will not be treated as a supply of goods or services under GST, and the same would not attract GST.

Currently, Clause 8(a) of Schedule III, provides that Supply of warehoused goods to any person before clearance for home consumption shall be treated neither as a supply of goods nor supply of services.