Analysis of Amendments to the GST Act by the Finance Act, 2025
(As passed by Lok Sabha on 25.03.2025)
1. Expansion of Input Tax Credit (ITC) for ISDs [Sections 2(61) & 20 of CGST Act, 2017]
Proposed to amend the definition of “Input Service Distributor” in clause (61) of section 2 of CGST Act, 2017 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 reference to sub-section (3) and sub-section (4) of section 5 of the Integrated Goods and Services Tax Act in the definition of Input Service Distributor.
Further, the Bill provides amendments in Section 20(1) of the CGST Act so as to explicitly provide for distribution of ITC by the ISD in respect of inter-State supplies, on which tax has to be paid on RCM basis, by inserting a reference to sub-section (3) and sub-section (4) of section 5 of the IGST Act in the said sub-section. It further seeks to amend sub-section (2) of the said section so as to explicitly provide for distribution of ITC by the ISD in respect of inter-State supplies, on which tax has to be paid on RCM basis, by inserting reference to subsection (3) and sub-section (4) of section 5 of the IGST Act in the said sub-section.
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Amendment: Input Service Distributors (ISD) can now distribute ITC for inter-state supplies liable to tax under the Reverse Charge Mechanism (RCM).
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Implication: This change ensures proper allocation of ITC among distinct persons under the same PAN, improving compliance for businesses using ISD.
- Enforcement: 1st day of April, 2025
2. Clarification on the Definition of “Local Authority” [Section 2(69)]
Proposed to amend Section 2(69)(c) so as to substitute the term “municipal or local fund” with the terms “municipal fund or local fund” and to insert an Explanation after the said sub-clause, to provide the definitions of the terms “local fund” and “municipal fund” used in the definition of “local authority” under the said clause so as to clarify the scope of the said terms.
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Amendment: The term “fund” has been inserted in relation to municipal authorities. Additionally, definitions for “local fund” and “municipal fund” have been provided.
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Implication: This clarification removes ambiguity and ensures consistency in taxation for local government entities.
3. Introduction of “Unique Identification Marking” [Section 2(116A)]
A insert a new clause (116A) in section 2 will be inserted so as to define the expression “unique identification marking” to mean a mark that is unique, secure and nonremovable, for implementation of track and trace mechanism.
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Amendment: Introduces a digital marking system for goods to enhance tracking.
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Implication: Strengthens the tracking mechanism to reduce tax evasion and improve transparency in the supply chain.
4. Changes in the Time of Supply Provisions [Sections 12 & 13]
Section 12(4) and Section 13(4) of the CGST Act will be omitted 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.
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Amendment: Sub-section (4) in both sections has been omitted.
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Implication: Simplifies tax compliance by removing certain time constraints related to the determination of tax liability.
5. Amendment in ITC Eligibility [Section 17(5)]: Change in definition of Plant or Machinery
In Section 17(5) of the Central Goods and Services Tax Act, 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, to remove any ambiguity in interpretation for the purpose of availment of input tax credit in such cases.
Also, a new Explanation will be inserted as:
“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”;”
The above Explanation clarifies the said amendment is made notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority.
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Amendment: The term “plant or machinery” is replaced with “plant and machinery,” with retrospective effect from July 1, 2017.
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Implication: Ensures uniform interpretation of ITC provisions, overriding previous court judgments.
6. Amendment in Credit Note Adjustments [Section 34]
The Bill will amend the proviso to Section 34(2) of the CGST Act so as to explicitly provide for the 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. 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.
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Amendment: Restricts tax liability reduction if ITC on the credit note has not been reversed or if the tax burden has been passed on.
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Implication: Prevents misuse of credit notes and ensures fair tax adjustments.
7. Updates to Auto-Populated Returns [Section 38]
The Finance Bill, 2025 seeks to amend Section 38(1) of the CGST 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 statement of input tax credit.
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Amendment: Changes references from “auto-generated statement” to “statement” and introduces additional prescribed details.
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Implication: Provides flexibility in return filing and enhances reporting accuracy.
8. Changes in Return Filing Conditions [Section 39]
Section 39(1) of the CGST Act will be amended to provide for an enabling clause to prescribe conditions and restriction for filing of return under the said sub-section.
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Amendment: Adds conditions and restrictions for timely return filing.
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Implication: Ensures stricter compliance with return filing norms.
9. Appeal Conditions for Penalty Orders [Sections 107 & 112]
The Finance Bill, 2025 will substitute the proviso to Section 107(6) of the CGST 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. Further, it will insert a proviso to Section 112(8) of CCST Act to provide for the requirement of pre-deposit of 10% of the penalty amount for filing an appeal before the Appellate Tribunal (GSTAT) against an order which involves demand of penalty without involving any demand of tax.
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Amendment: Mandates a pre-deposit of 10% of the penalty amount for filing an appeal.
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Implication: Discourages frivolous appeals and ensures accountability.
10. Penalty for Non-Compliance with the Track and Trace Mechanism [New Section 122B]
A new Section-122B will be inserted in CGST Act, as:
“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.”
The new Section 122B imposes a penalty on individuals who violate the provisions of Section 148A. In addition to any other applicable penalties, the offender must pay either Rs. 1 lakh or 10% of the tax payable on the goods, whichever is higher.
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Amendment: Introduces a penalty of Rs. 1 lakh or 10% of tax payable for failing to comply with the tracking mechanism.
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Implication: Enforces stricter adherence to the new digital tracking system.
11. Establishment of Track and Trace Mechanism [New Section 148A]
The Finance Bill, 2025 introduced track and trace mechanism vide a new section 148A in the CGST 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. The Section 148A of CGST is reproduced here:
“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),
as may be prescribed.”
Section 148A empowers the government to mandate a track and trace system for specified goods and persons handling them. It allows for the affixation of unique identification markings on such goods and electronic record-keeping. Businesses dealing with these goods must comply by marking, maintaining records, providing machinery details, and paying prescribed fees.
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Amendment: Government can mandate digital tracking for specific goods, including unique ID marking.
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Implication: Improves supply chain transparency and tax compliance.
12. Changes in GST Treatment for Special Economic Zones [Schedule III]
The Finance Act, 2025 seeks to insert a new clause (aa) in paragraph 8 of Schedule III of the CGST Act to specify that the supply of goods warehoused in a Special Economic Zone(SEZ) 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.
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Amendment: Includes warehouse supplies in SEZs and FTWZs under exempt transactions, with retrospective effect from July 1, 2017.
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Implication: Streamlines GST application on SEZ-related transactions.
13. No Refund for Erroneous Tax Collection [Section 128]
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Amendment: No refund will be provided for tax collected incorrectly before the amendment.
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Implication: Prevents revenue loss due to retrospective claims.