Union Budget 2025-26: Direct & Indirect Tax Highlights

The Union Budget 2025-26 introduces several amendments to indirect taxes, covering GST and customs. In GST, changes include allowing Input Service Distributors to distribute input tax credit for inter-state supplies on a reverse charge basis (effective April 1, 2025), clarifications on local authority definitions, and new penalties for Track and Trace Mechanism violations. Amendments also impact tax credit reversal, return filing conditions, and appeals involving penalties. Additionally, supply of goods in Special Economic Zones or Free Trade Warehousing Zones will not be considered as supply, effective from July 1, 2017. Customs reforms focus on rationalizing tariff structures and reducing duty on industrial goods. Seven tariff rates are removed, leaving eight, while Social Welfare Surcharge exemptions apply to 82 tariff lines. Key sectors benefit from customs duty reductions, such as full exemption for 36 lifesaving drugs, lower duties on critical minerals, and extended exemptions for shipbuilding and telecommunication imports. Export promotion measures include extending the export period for handicrafts and railway MRO goods.

Trade facilitation measures include setting a two-year time limit for provisional assessments, voluntary compliance for import/export duty discrepancies, and extended compliance timelines for end-use-based exemptions. The IGCR condition for importing seeds for lab-grown diamonds is removed. TDS/TCS rationalization includes reducing TDS rates and increasing thresholds, raising limits for senior citizens and rental income, and decriminalizing TCS delays. The updated return filing period extends to 48 months, and reporting requirements for crypto-assets are introduced. Further simplifications include tax relief for charitable trusts, removal of higher TDS/TCS for non-filers, and extended startup tax benefits. The new tax slabs under the revised regime lower tax burdens for middle-income groups.

Indirect Taxes

GST

Section 2 Amendments:

• Clause (61): Allows Input Service Distributor to distribute input tax credit for inter-state supplies where tax is paid on reverse charge basis, effective from 1st April 2025.
• Clause (69) (c): Clarifies the definitions of ‘Local Fund’ and ‘Municipal Fund’ under the term “local authority”.
• Clause (112A): New definition for “Unique Identification Marking” for the Track and Trace Mechanism.
• Amendments in Section 12 and 13: Omission of sub-sections related to the time of supply concerning vouchers.
• Amendments in Section 17: Substitution of “plant or machinery” with “plant and machinery” to be effective from 1st July 2017.
• Amendments in Section 20: Input tax credit distribution for inter-state supplies with reverse charge tax explicitly mentioned, effective from 1st April 2025.
• Amendments in Section 34: Requirement for reversing input tax credit for credit notes, if availed, by the registered recipient.
• Amendments in Section 38: Omission of the term “auto-generated” and insertion of “including” for more inclusivity in reporting input tax credit details.
• Amendments in Section 39: Enabling provision for conditions and restrictions related to return filing.
• Amendments in Sections 107 and 112: 10% mandatory pre-deposit of penalty for appeals involving only penalty demand, with no tax demand, in both Appellate Authority and Appellate Tribunal cases.
• Insertion of Section 122B: New penalties introduced for contraventions related to Track and Trace Mechanism under section 148A.
• Insertion of Section 148A: Provisions for implementing the Track and Trace Mechanism for specified commodities.
• Amendments in Schedule III: Supply of goods warehoused in Special Economic Zones or Free Trade Warehousing Zones will not be treated as supply, effective from 1st July 2017. Refund of tax already paid will not be available for such transactions.

Other Provisions:

• Exemption from Service Tax: Insurance services related to the Weather Based Crop Insurance Scheme and Modified National Agricultural Insurance Scheme are exempted from service tax for the period from 1st April 2011 to 30th June 2017.

Customs

Rationalization of Customs Tariff for Industrial Goods

• Reduction in Tariff Rates: Seven additional tariff rates removed, leaving only eight, including ‘zero’ rate.
• Cess Adjustments: Appropriate cess applied to maintain duty incidence, with a marginal reduction on select items.
• Simplified Surcharge Structure: Social Welfare Surcharge exempted on 82 tariff lines subject to a cess.

Sector-Specific Customs Duty Reforms

• Pharmaceuticals: 36 lifesaving drugs fully exempted from Basic Customs Duty (BCD), with six additional medicines getting a 5% concessional rate.
• Critical Minerals: BCD fully exempted on cobalt powder, lithium-ion battery waste, lead, zinc, and 12 more minerals.

Electronics

• BCD on Interactive Flat Panel Displays (IFPDs) increased from 10% to 20%.

• Exemption for Open Cell TV parts to boost domestic production.
• Lithium-Ion Batteries  63 additional capital goods exempted to support EV and mobile battery manufacturing.
• Shipping: BCD exemptions for shipbuilding extended for another 10 years.
• Telecommunication: BCD on Carrier Grade Ethernet Switches reduced from 20% to 10%.

Export Promotion Measure

• Handicrafts: Export period extended from six months to one year, with an additional three-month extension option.

Leather:

• Full BCD exemption on Wet Blue Leather for domestic processing.
• Export duty exemption on crust leather (previously 20%) to aid small tanners.

Marine Products

• BCD on Frozen Fish Paste (Surimi) reduced from 30% to 5%
• BCD on fish hydrolysate cut from 15% to 5% to support fish and shrimp feed
• Railway Maintenance, Repair, and Overhaul (MRO): Extended export period for imported railway goods from six months to one year, extendable by another year.

Trade Facilitation Measures in Budget 2025

• Time Limit for Provisional Assessments: Set at two years, extendable by one year, to ensure faster resolution.
• Voluntary Compliance Scheme: Allows importers/exporters to declare post-clearance discrepancies, pay duty with interest but without penalties, unless an audit or investigation is initiated.
• Extended End-Use Compliance Timeline: Industry now has one year (instead of six months) to use imported inputs, with quarterly reporting instead of monthly. Extended Duration for Export of Handicrafts: The time limit for export of handicrafts manufactured from duty-free inputs is being increased from 6 months to 1 year, with a further extension of 3 months if required.
• Removal of IGCR Condition for Import of Seeds for Lab-Grown Diamonds: The Customs (Import of Goods at Concessional Rate of Duty or For Specific End Use) Rules, 2022 (IGCR) condition for customs duty exemption on import of seeds used in rough Lab-Grown Diamond manufacturing is being removed.

1. Extended Time Limit for Export of Repaired Foreign-Origin Goods: The time limit for the export of foreign-origin goods imported for repairs is being extended from 6 months to 1 year, with a further 1-year extension for railway goods.

2. Amendment to IGCR Rules for End-Use Compliance: Rules 6 and 7 of the Customs (Import of Goods at Concessional Rate of Duty or For Specific End Use) Rules, 2022 are being amended to….

• • • Extend the end-use fulfillment period from 6 months to 1 year.
    • Reduce compliance burden by requiring only a quarterly statement instead of a monthly statement.

Direct Tax

TDS/TCS Rationalization Measures in Budget 2025

• Fewer TDS Rates & Higher Thresholds: The number of TDS rates and deduction thresholds will be reduced for better clarity and uniformity.

Higher TDS Limits for Senior Citizens & Rent:

• Interest Income for Senior Citizens: TDS exemption limit doubled from ₹50,000 to ₹1 lakh.
• Rental Income: TDS threshold increased from ₹2.40 lakh to ₹6 lakh, reducing compliance burden for small taxpayers.

Changes in TCS (Tax Collected at Source)

• Higher Threshold for LRS Remittances: The TCS threshold for foreign remittances under the Liberalized Remittance Scheme (LRS) has been increased from ₹7 lakh to ₹10 lakh.
• TCS Exemption for Education Loans: No TCS will be collected on education-related remittances funded by loans from recognized financial institutions.
• Removal of TCS on Sale of Goods: To ease compliance, TCS will no longer apply to transactions involving the sale of goods.

Reduction in TDS/TCS Rates

Increase in TDS/TCS Thresholds

Individuals/entities required to comply with these provisions. Below are the updated thresholds:

Higher TDS Only for Non-PAN Cases

• The higher rate of TDS will now apply only to taxpayers who do not have a valid PAN, reducing compliance burdens for businesses.

Decriminalization of TCS Delays

• Similar to TDS decriminalization in July 2024, TCS delays up to the filing due date will also be decriminalized, reducing penalties for businesses.

Extension of Time Limit for Filing Updated Returns

• The time limit to file updated returns has been extended from 24 months to 48 months from the end of the relevant assessment year. This provides taxpayers with more time to correct or update their tax returns without facing penalties. The tax payable will depend on when the updated return is filed:
• 60% of the tax and interest on additional income if filed within 24-36 months.
• 70% of the tax and interest if filed within 36-48 months.

Reporting Requirement for Crypto-Assets

• The government plans to amend the tax laws to require prescribed reporting entities to report transactions related to crypto-assets. This move aims to provide better tracking and transparency around crypto-asset transactions. Furthermore, the definition of “virtual digital assets” will be aligned accordingly.

Simplification of Annual Value for Self-Occupied Property

• The government proposes that if the owner of a house property occupies it as their own residence, or cannot occupy it for any reason, the annual value of the property will be considered as nil for tax purposes, simplifying the process of calculating income from house property.

Omission of TCS on Sale of Specified Goods

• To reduce the compliance burden, the government proposes to omit TCS (Tax Collected at Source) on the sale of specified goods valued over ₹50 lakh. This reduction will simplify tax filing and collection procedures for businesses and individuals dealing with high-value goods.

Removal of Higher TDS/TCS for Non-Filers

• Sections 206AB and 206CCA, which impose higher TDS and TCS rates on non-filers of income tax returns, are proposed to be omitted. This will reduce the compliance burden on businesses and individuals who are required to deduct or collect tax at source.

Rationalization of “Forest Produce” Definition

• The definition of “forest produce” under Section 206C(1) will be clarified to remove any ambiguity. It is also proposed that TCS be applicable only on forest produce obtained under a forest lease, simplifying the application of TCS in these cases.

Extension of Time Limit for Startups (Section 80-IAC)

• The benefit under Section 80-IAC for startups will be extended for another five years. This extension will make the benefits available to eligible startups incorporated before April 1, 2030, encouraging more innovation and entrepreneurship.

Parity in Long-Term Capital Gain Tax for Non-Residents

• The government has proposed bringing parity in the taxation of long-term capital gains between residents and non-residents (Foreign Institutional Investors). This will ensure that the capital gains tax treatment for foreign investors is aligned with that for domestic investors.

Simplification for Charitable Trusts/Institutions

• The validity of registration for charitable trusts and institutions will be extended from 5 years to 10 years. This measure aims to reduce paperwork and compliance for smaller trusts and institutions. Additionally, the definition of “specified violation” for cancellation of registration will be rationalized, exempting minor defaults such as incomplete applications.

Taxation of Business Trusts

• Business trusts (e.g., Real Estate Investment Trusts or Infrastructure Investment Trusts) will now have their income taxed at the maximum marginal rate subject to provisions of Section 112A, simplifying the tax treatment for such trusts.

Tax Relief Measures for Charitable  Trusts & Institutions 

• The registration period for small charitable trusts and institutions is being increased from 5 years to 10 years, reducing their compliance burden. The government aims to ensure that minor defaults, such as incomplete applications, do not lead to severe tax consequences for charitable organizations.

Tax Benefit for Self-Occupied Properties

• Currently, taxpayers can claim the annual value of self-occupied properties as nil only under certain conditions. The benefit will now extend to two self-occupied properties without any conditions, making it easier for homeowners to avail of tax relief.

The government has proposed substantial relief for the middle class through a revision of the tax slabs under the new tax regime. The updated slabs are as follows.

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