Budget 2025: GST Expectations Across Sectors And How This Will Impact The Indian Economy

Budget 2025: Currently, hybrid vehicles face a high tax rate of 28 per cent which is much higher as compared to EVs. It is expected that a change in GST rate might be announced in this Budget.

India must consistently work on reducing its dependence on fossil fuels and ensure that it has stable and affordable energy supplies to meet its ever-increasing energy requirements.

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By Smita Singh and Prateek Sagar

The Union Minister for Finance, Mrs. Nirmala Sitharaman is expected to present the Union Budget 2025 on 1 February 2025 and unveil the government’s planned initiatives for the next year. With respect to GST, we know that any change is required to be first approved by the GST Council, however, the industry always anticipates changes that would facilitate wider growth of the economy, sectoral growth, development of infrastructure, boost manufacturing, etc. Some of the key areas which we may expect to be considered by the Finance Minister are discussed below.

Reforms For Hybrid And Electric Vehicles

The next available alternative to Electric vehicles (EVs) is Hybrid vehicles. Hybrid vehicles offer a significant reduction in greenhouse gas emissions and increase fuel efficiency, thereby decreasing the import cost of crude oil imports. A reduction in the GST rate on hybrid vehicles would make them more affordable for Indian consumers. This would also incentivise automakers to invest in research and innovation of advanced hybrid technologies, acting as a push from Internal Combustion Engine vehicles to Hybrid Vehicles.

Currently, hybrid vehicles in India face a high tax rate of 28 per cent which is much higher as compared to EVs. It is expected that a change in GST rate might be announced in this Budget. Further, manufacturers of EVs would be able to claim a refund of the unutilised accumulated ITC as EVs attract a lower GST rate than major inputs like lithium-ion batteries. It is expected that the government may streamline and fasten the refund procedure for manufacturers of electric vehicles which would unblock their working capital and improve cash flows.

Retail Sector 

It is expected that the GST rates on mass-consumption FMCG products, such as personal care items and packaged foods, may be reduced to match the needs of common people. This would result in the increased sales and production of these goods and ultimately higher tax collections. This also aligns with the government's inclusive growth agenda, ensuring that essential products are accessible to all segments of society while stimulating economic growth.

Renewable Sector

India must consistently work on reducing its dependence on fossil fuels and ensure that it has stable and affordable energy supplies to meet its ever-increasing energy requirements. This is fundamental for meeting the target of achieving net zero by 2070. Therefore, it becomes essential that reforms are made in the energy sector to promote sustainable growth and mitigate the impact of climate change. In this regard, several exemptions on GST rates on inputs and capital goods have already been allowed for manufacturing solar panels and cells. Also, the government provided exemption from customs duty levied on the import of certain specified inputs used in manufacturing solar panels and cells till March 2026.

However, there is an urgent need to simplify GST applicable on solar project costs or engineering, procurement, and construction (EPC) services, so as to enable the industry to efficiently structure these transactions. Presently, GST on specified renewable energy-related EPC projects can be paid in the ratio of 70:30 for goods and services respectively, wherein a 12 per cent rate is applicable on goods and an 18 per cent rate is applicable on services. However, due to applicable exemptions on various goods, companies struggle in finding a cost-effective solution whether to have multiple separate contracts for goods and services (to avail the concessional rate benefits) or directly go for an EPC model. Further, there is a need for clear definitions and clarity to bring inputs used in the renewable energy sector in the correct tax brackets.

Boost Manufacturing

Further, India has recently completed 10 years of the ‘Make in India’ programme and the ‘Vocal for Local’ initiative. However, our manufacturing growth rate averaged around 6 per cent, which is much lower than the benchmark of 12-14 per cent. The government may take steps to give the necessary impetus to the manufacturing activities in India by introducing new schemes, and incentives like the Production Linked Incentive (PLI) schemes that attracted foreign investments, boosting technological advancement and contributed to economic growth. Also, it is expected that new schemes may be introduced to replace the duty deferment benefit provided by the existing MOOWR scheme.

Curbing Tax Evasion 

The government may present measures to curb tax evasion and leakages by enforcing the Track and Trace mechanism for marking, identifying, and tracking the specified goods through the supply chain. Also, an amendment in law with respect to the Invoice Management System (IMS) has already been proposed. Implementation of the Track and Trace Mechanism combined with the IMS will safeguard revenue leakages, strengthen tax collection, and easily detect fraudulent activities.

The anticipated changes in the Union Budget 2025 aim to promote sustainable growth and enhance the affordability of essential goods. Additionally, such measures will boost manufacturing and curb tax evasion, thereby strengthening the economy and ensuring inclusive growth. These changes collectively position India for a more resilient and prosperous future.

(Smita Singh is the Partner at S&A Law Offices, while Prateek Sagar holds the designation of Principal Associate at the company.)

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