The Finance Bill 2025 proposes 11 significant amendments to GST provisions, addressing anomalies and introducing new mechanisms. Effective April 2025, input tax credit (ITC) distribution by input service distributors (ISD) now explicitly includes IGST for reverse charge transactions, correcting prior limitations. A clarification on the definition of “local authority” expands the scope to include funds managed by municipal and panchayat areas. A track-and-trace system for specified goods will require unique identification markings, with penalties for non-compliance. The bill removes special time-of-supply clauses for vouchers, aligning them with the general taxability of underlying goods or services. A retrospective amendment disallows ITC for construction of plant or machinery, negating a previous court ruling. Suppliers can reduce tax liability on outward supply only when the recipient reverses the corresponding ITC. GSTR-2B changes allow taxpayers to regenerate ITC statements under the Integrated Management System (IMS). New restrictions on filing GSTR-3B returns and a 10% mandatory pre-deposit for penalty-only appeals are introduced. Retrospective provisions from July 2017 clarify that goods warehoused in SEZs or FTZWZs before export or DTA clearance are neither supplies of goods nor services. These amendments aim to streamline compliance, improve tracking, and address legal ambiguities, though some provisions, like retrospective ITC disallowance, may face legal scrutiny.
1. Explicitly provide for the distribution of ITC by the ISD in respect of inter-state supplies on which tax has to be paid on an RCM:
Clause 116,120 of Finance Bill 2025:
Effective from 01st April 2025
i. As per the Finance Act 2024, the definition of Input service distributor was expanded to cover Reverse charge paid under the CGST / SGST Act 2017.
ii. As correction of anomaly, it is now expanded to also cover taxes paid under IGST under Section 5(3) and 5(4) of the IGST Act 2017.
iii. Therefore, the act now explicitly provides for the distribution of inter-state ITC by ISD for reverse charge transactions.
2. Explanation inserted under the definition of local authority for clarifying the scope of the terms of Local Fund and Municipal Fund: –
Clause 116 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. The definition of local authority covers 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 fund or local fund;
ii. The terms ‘Municipal Fund’ and ‘Local Fund’ has now been defined to cover funds under the control / management of authority of local government established for discharging civic functions in relation discharging civic functions relation to Municipal and Panchayat area respectively.
3. Amendments relating to the insertion of new sections in respect of Track and Trace Mechanism for specified commodities as will be notified : –
Clause 116 of the Finance Bill, 2025.
Clause 126 of the Finance Bill, 2025.
Clause 127 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. A new track and trace mechanism would be prescribed for certain goods and the person / class of persons who are in possession of such goods.
ii. It would provide the system for enabling affixation of unique identification marking on such goods.
iii. Such marking may be a digital stamp, digital mark or any similar marking which is unique, secure and non-removable.
iv. This marking would enable electronic storage and access of prescribed information. These notified persons need to:
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- furnish information and details within such time.
- Maintain records or documents in such form and manner.
- Furnish details of machinery installed in the place of business of manufacture.
- Pay such amount in relation to the prescribed system.
v. Further, a person who acts in contravention of the given provisions would additionally be liable to a penalty of Rs. 1 lakhs or 10% of the tax payable whichever is higher.
4. Provision relating to Time of Supply in respect of the Vouchers is being deleted: –
Clause 117 of the Finance Bill, 2025.
Clause 118 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. It was clarified through Circular No. 243/37/2024-GST dated 31st December 2024 that the vouchers are not per se taxable, and it is the underlying goods / services which are taxable under the GST law.
ii. The time of supply provisions are now modified to remove the special clause in relation to supply of vouchers.
iii. The underlying goods / services would now be taxable under the normal provisions of time of supply as per Section 12 / 13 of the CGST Act 2017.
5. Retrospective amendment to disallow ITC on goods / services used for construction of plant or machinery: –
Clause 119 of the Finance Bill, 2025.
Effective from 01st July 2017 retrospectively.
i. The Apex Court in the case of ‘Safari Retreats’ had distinguished the term ‘Plant or machinery’ with ‘Plant and machinery’. Further, it allowed ITC on goods / services used for construction of ‘Plant or machinery’.
ii. With an objective to negate this judgement, the Government has brought in a retrospective amendment w.e.f 1st July 2017. This would now be construed as ‘Plant and machinery’. Therefore, it purports to disallow ITC on goods / services used for construction of land and building w.e.f 1st July 2017.
iii. The sanctity of the retrospective amendment disallowing all past ITC is yet to be tested in the Court of law. There are quite a few Apex Court judgements which prohibit any retrospective amendments which are adverse to the taxpayers.
6. Reduction of Tax liability on Outward Supply only when the ITC on the same is reversed by the recipient: –
Clause 121 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. This is to explicitly provide for requirement of reversal of corresponding ITC 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.
ii. Currently, the given provision is only for credit note issued for post-sale discount and not other cases.
iii. This is being implemented as part of the IMS initiative also. This is to ensure non-reduction of output taxes by the supplier upon rejection by the recipient.
7. Amendment in GSTR-2B consequential to the IMS initiative: –
Clause 122 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. Section 38(1) is being amended to omit the expression “auto generated” with respect to statement of input tax credit in GSTR-2B in the said subsection. GSTR-2B would now be regenerated and re-computed by taxpayer as part of IMS initiative.
ii. Section 38(2) is being amended 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.
8. Enabling clause to prescribe conditions and restrictions for filing of return: –
Clause 123 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. 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. Mandatory 10% Pre-Deposit for Penalty Appeals Before Appellate Authority: –
Clause 124 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. As of now, a pre-deposit of 25% has been prescribed for e-waybill cases involving only penalty.
ii. For other cases involving only penalty, no pre-deposit is currently required.
iii. It has been provided that the pre-deposit would be considered as 10% of the penalty where the demand pertains only to penalty and not tax amount.
10. 10% mandatory pre-deposit of penalty amount for appeals before Appellate Tribunal in case involving only penalty:
Clause 125 of the Finance Bill, 2025
Prospectively from the date of the enactment
i. Currently, no pre-deposit has been separately prescribed for appeal before the Appellate Tribunal if the demand pertains only to the penalty.
ii. Even for appeal before the Appellate Tribunal, it has been provided that the pre-deposit would be considered as 10% of the penalty where the demand pertains only to penalty and not tax amount.
11. Supply of goods warehoused in SEZ / FTZWZ before clearance for exports / DTA-
Clause 128 of the Finance Bill, 2025.
Clause 129 of the Finance Bill, 2025
Retrospectively wef the 1st day of July, 2017.
i. It has been provided that 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.
ii. The meaning of the terms Special Economic Zone, Free Trade Warehousing Zone and Domestic Tariff Area would be borrowed from the Special Economic Zones Act 2005.
Source: Budget Speech on 01st February 2025, Finance Bill 2025, Memorandum Budget 2025
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