India has overhauled its tax system in 2025 with drastic cuts in goods and services tax (GST) rates and a higher income tax exemption limit, with the upcoming budget now focusing on streamlining customs duties and simplifying procedures.
Next year, the new Simplified Income Tax Law of 2025 will come into force on April 1, replacing the current Income Tax Law of 1961, which is over six decades old.
Also, two new laws will come into force on a date decided by the government – one to levy additional excise duty on cigarettes and another to levy a levy on pan masala over and above the GST rates.
The tax reforms introduced by the government in 2025 were aimed at stimulating demand in a challenging global economic environment. With tariff uncertainties casting a shadow over economic decisions, India’s tax reform measures have focused on boosting domestic demand to boost consumption and support growth.
A key highlight was the reduction in GST rates on around 375 goods and services effective September 22, reducing the tax burden on commonly used items and addressing long-standing concerns about inverted duty structures.
The move to compress the four-tier GST master structure of 5, 12, 18 and 28 per cent into two main rates of 5 and 18 per cent, while retaining a 40 per cent levy on sin goods only, marked a major step towards streamlining and simplifying the indirect tax system.
The GST overhaul should make the indirect tax system simpler and more predictable, with fewer tax rates and less litigation.
On the collection front, the GST mop-up touched a record high of ₹2.37 lakh crore in April and averaged ₹1.9 lakh crore in the current financial year. The sweeping tariff cuts have put some pressure on GST revenues and slowed the growth rate.
India’s goods and services tax (GST) revenue fell to an annual low of ₹1.70 lakh crore in November – rising a meager 0.7 per cent year-on-year. November was the first month in which the GST cut, effective September 22, took full effect.
In the area of direct taxes, the government has raised the personal income tax exemption limit, providing relief to middle-income taxpayers and leaving consumers with more disposable income. The move was seen as boosting consumption, particularly for urban households, while strengthening voluntary compliance with the simplified tax regime.
In the Budget 2025, it was announced that no income tax will be payable on income of Rs 12 lakh per annum under the new income tax regime, which provides for lower tax rates without availing exemptions and deductions.
The tax rates applicable under this scheme are 5 percent of income between ₹4 and ₹8 lakh, 10 percent (₹8 to ₹12 lakh) and 15 percent (₹12 to ₹16 lakh). A tax rate of 20 percent applies to income between ₹ 16 and ₹ 20 lakh, and 25 percent (₹ 20 to ₹ 24 lakh) and 30 percent to income above ₹ 24 lakh.
However, the tax cuts slowed corporate tax collections between April and mid-December. Net corporate tax (including taxes paid by individuals, HUFs and companies) rose 6.37 per cent to ₹8.47 lakh crore between April 1 and December 17, compared to a 10.54 per cent increase in net corporate tax to ₹8.17 lakh crore.
The number of refunds slowed down in the current financial year as the Income Tax Department conducted additional analysis of high amount refund claims. According to recent data, refund performance fell 14 per cent year-on-year to over ₹2.97 lakh crore.
With major GST and income tax reforms largely implemented, policymakers have now turned their focus to rationalizing tariffs.
Finance Minister Nirmala Sitharaman recently said that customs simplification is the government’s next big reform agenda. There is a need to transfer the advantages of income tax, such as faceless assessment, to the customs side in the interests of transparency and to entail a rationalization of customs rates.
The government has steadily reduced tariffs over the past two years. But the few items for which the rates are still above the optimal level would also have to be reduced. “Customs is my next big cleanup job,” Sitharaman said.
In the 2025-26 budget, the government proposed removing seven additional tariffs on industrial goods, after already eliminating seven tariffs in 2023-24. The measure reduced the total number of tariff rates to eight.
As India moves into the next phase of tax reform, simplification, predictability and ease of doing business are likely to remain at the forefront of the policy agenda.
Mahesh Jaising, partner and head of indirect taxes at Deloitte India, said: “The changing trade patterns, rising compliance costs and persistent procedural bottlenecks signal the need for the next phase of customs reforms.”
Rahul Shekar, Global Partner at Nangia – Indirect Tax, said the focus should be on end-to-end digitalization of customs processes with consistent documentation, predictable classification practices and faster, risk-based clearances, which would enhance trade facilitation and investor confidence.
The government could consider a one-time amnesty scheme for legacy tariff disputes to free up revenue and reduce litigation burden, he added.
Published on December 25, 2025