After undertaking sweeping reforms in GST and income tax in 2025, the government is now preparing the ground for the next phase of tax reform, with customs duty rationalisation and procedural simplification expected to take centre stage in the forthcoming Union Budget.
India's tax architecture saw a major reset in 2025, marked by sharp GST rate cuts and a higher income tax exemption limit, as policymakers sought to stimulate domestic demand amid global economic uncertainty and volatile trade conditions.
New Income Tax Act to Take Effect from April 1
One of the most significant reforms on the direct tax front will come into force next year, with the simplified Income Tax Act, 2025 set to replace the six-decade-old Income Tax Act, 1961 from April 1. The new legislation is aimed at reducing complexity, minimising litigation, and improving voluntary compliance.
In addition, the government will implement two new indirect tax laws, one to levy an additional excise duty on cigarettes, and another to impose a cess on pan masala over and above existing GST rates on dates to be notified.
GST Rate Cuts to Boost Consumption
The tax reforms rolled out in 2025 were largely focused on boosting consumption in a challenging global environment marked by tariff uncertainty and slowing demand. A key highlight was the reduction of GST rates on around 375 goods and services, effective September 22, which lowered prices of commonly used items and addressed long-standing issues such as inverted duty structures.
The government also moved to compress the four-tier GST slab structure-5, 12, 18 and 28% into two principal rates of 5% and 18%, while retaining a 40% levy only on sin goods. The rationalisation was aimed at making GST simpler, more predictable and less litigation-prone.
GST Collections Moderate After Rate Rationalisation
On the revenue front, GST collections touched a record Rs 2.37 trillion in April and averaged around Rs 1.9 trillion during the current fiscal year. However, the sweeping rate cuts have put some pressure on revenue growth.
GST collections fell to a year-low of Rs 1.70 trillion in November, recording a modest 0.7% year-on-year growth. November was the first month to fully reflect the impact of the GST rate cuts implemented in September.
Income Tax Relief for Middle Class
On the direct tax side, the government raised the income tax exemption limit, leaving more disposable income in the hands of taxpayers and supporting urban consumption.
Under the new income tax regime, announced in the 2025 Budget, no tax is payable on annual income up to Rs 12 lakh. The slab structure under this regime provides lower rates without exemptions or deductions:
- 5% on income between Rs 4-8 lakh
- 10% on Rs 8-12 lakh
- 15% on Rs 12-16 lakh
- 20% on Rs 16-20 lakh
- 25% on Rs 20-24 lakh
- 30% on income above Rs 24 lakh
While the measures provided significant relief, non-corporate income tax collections slowed. Net non-corporate tax collections grew 6.37% to Rs 8.47 trillion between April 1 and December 17, compared to 10.54% growth in net corporate tax, which stood at Rs 8.17 trillion.
Refund Issuance Slows Amid Scrutiny
Refund issuances also declined during the current fiscal year, as the Income Tax Department undertook additional scrutiny of high-value refund claims. Refunds issued dropped 14% year-on-year to over Rs 2.97 trillion, according to official data.
Customs Duty Reform Next on Agenda
With major GST and income tax reforms largely in place, the government is now turning its attention to customs duty rationalisation. Finance Minister Nirmala Sitharaman has indicated that simplification of customs procedures will be the next major reform thrust.
The government has already been reducing customs duties over the past two years, but items where rates remain above optimal levels are likely to be reviewed further. Sitharaman has emphasised the need to bring principles such as faceless assessment, transparency, and predictability-successfully implemented in income tax-into the customs framework.
In the Budget 2025-26, the Centre proposed eliminating seven additional customs tariff rates on industrial goods, following a similar move in 2023-24. This has reduced the total number of tariff slabs to eight, signalling a gradual move towards a simpler tariff structure.
Experts Call for Digitalisation and Dispute Resolution
Tax experts believe the next phase of customs reforms should focus on end-to-end digitalisation, uniform documentation, predictable classification practices and risk-based faster clearances to enhance trade facilitation and investor confidence.
Some experts have also suggested a one-time amnesty scheme for legacy customs disputes to unlock stuck revenue and reduce litigation burden.
As India enters the next phase of tax reforms, simplicity, predictability and ease of doing business are expected to remain at the core of the government's policy agenda.
CAclubindia
