In 2025, India significantly reworked its tax system by sharply cutting GST rates and increasing the income tax exemption limit, with attention now shifting to customs duty reform and simpler procedures in the upcoming Budget.
A new, simplified Income Tax Act, 2025, will take effect from April 1 next year, replacing the Income Tax Act of 1961 that has been in place for over 60 years.
India’s 2025 Tax Overhaul Shifts Focus from GST and Income Tax Cuts to Customs Reform
Two additional laws will also be introduced, one imposing extra excise duty on cigarettes and another levying a cess on pan masala on top of existing GST, with implementation dates to be set by the government.
These tax reforms were introduced to boost demand in the face of a difficult global economic environment, as uncertainty around tariffs affected economic decision-making.
The government focused on strengthening domestic consumption to support economic growth through tax relief measures.
A major step was the reduction of GST rates on around 375 goods and services from September 22, easing the tax burden on commonly used products and correcting inverted duty structures.
The GST system was further simplified by compressing four main tax slabs of 5, 12, 18, and 28 per cent into two primary rates of 5 and 18 per cent, while retaining a 40 per cent levy only for sin goods.
This overhaul aimed to make the indirect tax system simpler, more predictable, and less prone to disputes and litigation.
GST collections hit a record Rs 2.37 lakh crore in April and averaged Rs 1.9 lakh crore during the current fiscal year, though revenue growth slowed due to rate cuts.
GST collections fell to a year-low of Rs 1.70 lakh crore in November, growing just 0.7 per cent year-on-year, reflecting the full impact of the September rate reductions.
Higher Income Tax Exemption Brings Relief to Middle-Income Earners and Boosts Consumption
On direct taxes, raising the income tax exemption limit gave relief to middle-income earners, increased disposable income, and supported consumption, especially in urban areas.
The 2025 Budget set the exemption limit at Rs 12 lakh under the new tax regime, which offers lower rates without exemptions or deductions.
Under this regime, tax rates range from 5 per cent for incomes between Rs 4–8 lakh to 30 per cent for incomes above Rs 24 lakh, with graded slabs in between.
These tax cuts slowed non-corporate tax revenue growth, with collections rising 6.37 per cent compared to 10.54 per cent growth in corporate tax revenues.
Income tax refunds declined by 14 per cent to Rs 2.97 lakh crore due to additional scrutiny of high-value refund claims.
With GST and income tax reforms largely completed, policymakers are now prioritising customs duty rationalisation.
Finance Minister Nirmala Sitharaman said customs simplification is the government’s next major reform focus and noted, “Customs is my next big cleaning-up assignment.”
She emphasised adopting transparency measures like faceless assessments and further rationalising duty rates.
Government Pushes Further Customs Duty Cuts and Tariff Simplification in 2025–26 Budget
Over the past two years, customs duties have been reduced, and remaining rates above optimal levels are expected to be lowered.
The 2025–26 Budget proposed removing seven more customs tariff rates on industrial goods, reducing total tariff slabs to eight.
Going forward, tax policy will continue to prioritise simplicity, predictability, and ease of doing business.
Deloitte India’s Mahesh Jaising said evolving trade patterns, rising compliance costs, and procedural bottlenecks highlight the need for the next phase of customs reform.
Nangia Global’s Rahul Shekar stressed the need for end-to-end digitalisation, uniform documentation, predictable classifications, and faster risk-based clearances to boost trade and investor confidence.
He also suggested a one-time amnesty for legacy customs disputes to unlock revenue and reduce litigation.
