NEW DELHI: India undertook a major overhaul of its tax regime in 2025 with sharp cuts in Goods and Services Tax (GST) rates and a higher income tax exemption limit, shifting the policy focus towards customs duty rationalisation and procedural simplification in the coming Budget.
From April 1 next year, the newly enacted Income Tax Act, 2025 will replace the six-decade-old Income Tax Act, 1961, marking a significant step towards simplification of direct taxes. In addition, two new laws—one levying additional excise duty on cigarettes and another imposing a cess on pan masala over and above GST—will be implemented on dates to be notified by the government.
The tax reforms introduced in 2025 were aimed at stimulating domestic demand amid global economic uncertainty. With tariff volatility affecting investment and trade decisions, the government focused on boosting consumption through tax relief.
A major highlight was the reduction in GST rates on around 375 goods and services effective September 22, addressing inverted duty structures and lowering the tax burden on commonly used items. The move also marked a decisive shift towards compressing the four-tier GST structure of 5, 12, 18 and 28 per cent into two principal slabs of 5 and 18 per cent, while retaining a 40 per cent levy only for sin goods.
The GST overhaul was aimed at making the indirect tax regime simpler, more predictable and less litigation-prone. However, the sweeping rate cuts have weighed on revenue growth. GST collections hit a record Rs 2.37 lakh crore in April and averaged Rs 1.9 lakh crore during the fiscal year, but dipped to a year-low of Rs 1.70 lakh crore in November, growing just 0.7 per cent year-on-year—the first month reflecting the full impact of the rate cuts.
On the direct tax front, the government raised the income tax exemption limit to boost consumption and provide relief to middle-income taxpayers. Under the new tax regime announced in the 2025 Budget, income up to Rs 12 lakh is exempt from tax. Revised slabs range from 5 per cent on income between Rs 4–8 lakh to 30 per cent on income above Rs 24 lakh.
While the measures supported household spending, they also slowed non-corporate tax growth. Net non-corporate tax collections rose 6.37 per cent to Rs 8.47 lakh crore between April 1 and December 17, compared to a 10.54 per cent growth in corporate tax collections at Rs 8.17 lakh crore. Refund issuances also declined 14 per cent to Rs 2.97 lakh crore as tax authorities tightened scrutiny of high-value claims.
With major reforms in GST and income tax largely in place, policymakers are now turning to customs. Finance Minister Nirmala Sitharaman has identified customs simplification as the next major reform priority, calling for transparency, faceless assessments and further duty rationalisation.
The government has already reduced customs duties over the past two years and, in the 2025–26 Budget, proposed eliminating seven additional tariff rates on industrial goods, bringing the total number of slabs down to eight.
Tax experts say further reforms are needed. Deloitte India Partner Mahesh Jaising noted that evolving trade patterns and rising compliance costs signal the need for the next phase of customs reforms. Nangia Global Partner Rahul Shekar emphasised end-to-end digitalisation, uniform documentation, predictable classification and faster risk-based clearances to enhance trade facilitation. He also suggested a one-time amnesty scheme for legacy customs disputes to unlock revenue and reduce litigation.
As India moves into the next phase of tax reforms, simplification, predictability and ease of doing business are expected to remain central to the government’s policy agenda.
