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Informist, Tuesday, Mar. 25, 2025

--Lok Sabha passes Finance Bill, 2025

NEW DELHI – The Lok Sabha on Tuesday passed the Finance Bill, 2025 by a voice vote after two days of discussions. The Finance Bill, 2025 contains the tax changes and amendments to legislation proposed in the Budget. With this, the Budget approval process for the new financial year starting April has come to an end in the Lower House.   

On Friday, the Lok Sabha cleared the expenditure in 2025-26 (Apr-Mar) by approving the Demands for Grants and the Appropriation Bill. 

The Union Budget for FY26 announced a host of tax changes, the most important being the government's decision to raise income tax rebate to effectively mean that income of up to INR 1.2 million will not be taxed. "The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment," Finance Minister Nirmala Sitharaman had said presenting the Budget. The revised tax structure will lead to the government foregoing revenue to the tune of INR 1 trillion per year. Sitharaman had also announced tweaks to the new income tax slabs to give relief to taxpayers. 

On the indirect taxes side as well, the Budget proposed many changes, including lowering the number of customs duty tariff rates to eight from the current 15. The government also announced it would levy only one cess or surcharge on tariff lines subject to cess.

Speaking about the amendments moved to the Finance Bill, Sitharaman said the government wants to introduce a sunset date for the 6% equalisation levy or digital tax on online advertisements. The move is aimed at addressing the "uncertainty in the international economic conditions". According to tax experts, this proposal aims to move towards the Pillar II taxation system while also treading the path of being accommodative on the tariff front against the US threat to introduce reciprocal tariffs from Apr. 2.

The equalisation levy was imposed on online advertisement services from Jun. 1, 2016. Last year, the government removed the 2% equalisation levy on e-commerce transactions, but the 6% levy on online advertisements continued. "This change would now reduce the costs for digital advertisement consumers while lowering tax costs for digital advertisement platforms such as Google and Meta," Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen, said.

Sitharaman also said the amendments to the Finance Bill include changes to section 9A(3)(c) of the Income-tax Act, which currently says that the aggregate participation or investment by a person resident in India, in the eligible investment fund, directly or indirectly, should not exceed 5% of the corpus of the fund. The amendment proposes that the indirect participation or investment by a person resident in India, in the eligible investment fund, will not be considered for the 5% condition in section 9A.

"Hence, the requirement of monitoring and determining participation and investment by a person resident in India, where such participation and investment is made indirectly, shall no longer be required. This shall reduce compliance burden and enable relocation of fund managers of offshore funds," the Central Board of Direct Tax said in a note released after the Finance Bill was passed. 

GST CONUNDRUM

Responding to questions on goods and services tax, Sitharaman said the Opposition's allegation that "GST is not progressive, is absolutely unfounded, it is not true at all." She explained that as per the current GST structure and rates, the wealthiest 20% of Indians contribute 41.4% of household GST revenue and 14% of the total GST collections. On the other hand, the bottom 50% contribute just 28% of household GST revenue and 9.6% of the total GST revenues.

The finance minister said the poorest 50% of the Indian population face an average effective GST rate of 7.3% only, much lower than the revenue-neutral rate of 15.0% assumed at the time of the introduction of the GST regime in 2017. "As of March 2023, the average GST rate is 12.2%," she said. The GST structure has less than 3% of common consumption items attracting the highest 28% GST rate, she said. "So, the idea that GST is too high... is not progressive, is false."

On the discontinuation of sharing funds with states from the GST compensation cess even as the Centre continues to levy it, the finance minister reiterated that the government is levying the cess only to repay the loans taken during the COVID-19 pandemic to compensate the states. "And that (repayment of compensation cess) is also set to end by early 2026," she said.

The Centre, in order to bring states on board to agree to the GST regime, had promised to protect 14% revenue growth for states for the first five years by levying a cess on certain luxury and sin items such as tobacco, motor vehicles, expensive motorcycles, caffeinated beverages, and aerated drinks. Originally, the collection of GST compensation cess was to be discontinued in June 2022.

The Centre borrowed INR 2.69 trillion from the market in 2020-21 and FY22 and passed it on to states as back-to-back loans to partly meet the shortfall in collections during the COVID-19 pandemic.  The loans were to be repaid from the GST compensation cess collections.

Currently, a Group of Ministers, headed by Minister of State for Finance Pankaj Chaudhary, is looking into the future of the compensation cess after it is discontinued in March 2026, and what to do with additional funds, if any, after repaying the loans.  End

Reported by Priyasmita Dutta

Edited by Avishek Dutta and Saji George Titus

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