Finance Act, 2025-Changes in Section 17(5), GSTR 1 amendment, Schedule III and others!

The Finance Act, 2025, brings significant amendments to various provisions of the Central Goods and Services Tax (CGST) Act, 2017. These changes aim to clarify existing provisions, improve compliance, and streamline tax administration. Key amendments include modifications in the definition of "Local Authority" under Section 2(69), updates to the apportionment of Input Tax Credit (ITC) under Section 17(5), revisions in tax invoice and credit note provisions under Section 34, and crucial updates in Schedule III regarding transactions not considered as supply under GST. This blog provides a comprehensive overview of these critical changes and their impact on taxpayers.

Section- Clause 69- Definition of Local Authority:

 Section 2(69) of the CGST Act, 2017 defines the term “Local Authority”. It outlines the various types of local governing bodies, such as Panchayats, Municipalities, Zila Parishads, and other similar authorities, which are responsible for civic functions and have the authority to levy and collect taxes, duties, or fees.

In the earlier definition of the local authority, it included “local or municipal fund”. However, as there was no clarity in the section as to what is meant by local fund or municipal fund, it led to confusion amongst taxpayers as to how to determine whether it is a local fund or municipal fund.

Now, as per the amendment, the words “management of a municipal”, the word “fund” shall be inserted.

Further, the following Explanation is added to sub-clause (c) of clause 69 as follows: –

“Explanation– For the purposes of this sub-clause–

(a) “Local fund” means any fund under the control or management of an authority of a local self-government established for discharging civic functions in relation to a Panchayat area and vested by law with the powers to levy, collect, and appropriate any tax, duty, toll, cess or fee, by whatever name called;

(b) “Municipal fund” means any fund under the control or management of an authority of a local self-government established for discharging civic functions about a Metropolitan area or Municipal area and vested by law with the powers to levy, collect and appropriate any tax, duty, toll, cess or fee, by whatever name called”.

This amendment brings clarity as to defining the terms “local fund” and “municipal fund”.

Amendment of section 17- Apportionment of Credit and Blocked Credits:

Section 17 of the CGST Act, 2017 deals with the Apportionment of Credit and Blocked Credits. It states the conditions under which a registered person can claim the ITC on the goods and services they acquire. 

Section 17(5) covers the goods and services on which ITC can not be claimed as being blocked credit. Its clause (d) states that the ITC is not available for goods or services received by a taxable person for constructing immovable property. However, ITC can be claimed if a plant/ machinery is constructed.

The words “plant or machinery” are now substituted with “plant and machinery”. This amendment is w.r.t. recommendation in the 55th GST Council meeting and Safari Retreats Private Limited case.

Also, explanation 2 is added to such clause as follows:

“Explanation 2–– For clause (d), it is hereby clarified that notwithstanding anything to the contrary contained in any judgment, decree, or order of any court, tribunal, or other authority, any reference to “plant or machinery” shall be construed and shall always be deemed to have been construed as a reference to “plant and machinery”;”

This amendment brings retrospective amendment to clause (d) of section 17(5) w.r.t. definition of plant and machinery. 

The amended clause (d) is as follows:

“(d) Goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation 1- For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

Explanation 2- For the purposes of clause (d), it is hereby clarified that notwithstanding anything to the contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to "plant or machinery" shall be construed and shall always be deemed to have been construed as a reference to "plant and machinery".

Amendment of section 34- Amendment of Tax Invoice, Debit Note, and Credit Note:

Section 34 of the CGST Act, 2017 deals with the Amendment of Tax Invoice, Debit Notes, and Credit Notes. This section allows for the correction or modification of invoices, debit notes, and credit notes after they have been issued, under specific conditions.

Its sub-section 2 states that any registered person who issues a credit note about a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed.

A proviso is newly added to the said sub-section as follows:

“Provided that no reduction in an output tax liability of the supplier shall be permitted if the–

(i) Input tax credit as is attributable to such a credit note, if availed, has not been reversed

by the recipient, where such recipient is a registered person; or

(ii) Incidence of tax on such supply has been passed on to any other person, in other

cases.”

This amendment eliminates loss of revenue in case the supplier reduces its tax liability through amendment, but the buyer or any further buyer claims ITC of such amount.

Amendment of section 38- The communication of details of inward supplies and the eligibility of ITC:

Section 38 deals with the communication of details of inward supplies (purchases) and the eligibility for Input Tax Credit (ITC) on it. This section process of generation of GSTR 2B based on GSTR 1 or other forms filled by the suppliers. 

Since the IMS process is currently active, buyers submit their responses to the input tax credit displayed in the IMS window. The GSTR-2B is generated based on these responses. As a result, GSTR-2B is not entirely auto-generated but depends on the buyer's input. Therefore, the phrase “an auto-generated statement” is replaced with “a statement.”

Its Sub-section 2 specifies details to be covered in GSTR 2B. A new clause (c) is added to it as follows:

“(c) Such other details as may be prescribed.”.

Amendment of section 39- filing of GST returns by registered taxpayers

Section 39 deals with the filing of GST returns by registered taxpayers. It outlines when and how businesses must report their tax details, including sales, purchases, input tax credit (ITC), and tax payments.

It’s sub-section 1 states that every registered person shall furnish a return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars, in such form and manner, within such time as may be prescribed.

Now, words “and subject to such conditions and restrictions” are added.

Amendment of Schedule III- Goods/services not considered as supply under GST

Schedule III of the Central Goods and Services Tax (CGST) Act, 2017 outlines specific activities and transactions that are not considered as supply under the GST law, meaning they are exempt from GST. These activities are not subject to tax because they do not meet the criteria of a "supply" under the Act.

Following the new sub-clause is added clause 8 of such list with retrospective effect i.e. 01^st July 2017. It brings a supply of warehoused goods in SEZ/FTWZ before clearance: 

“(aa) Supply of goods warehoused in a Special Economic Zone or in a Free Trade Warehousing Zone to any person before clearance for exports or to the Domestic Tariff Area”

Also, the following explanation 3 is added in Schedule III:

“Explanation 3– For the purposes of clause (aa) of paragraph 8, the expression “Special

Economic Zone”, “Free Trade Warehousing Zone” and “Domestic Tariff Area” shall have

the same meanings respectively as assigned to them in section 2 of the Special Economic

Zones Act, 2005 (28 of 2005).”.

Conclusion

‍The amendments introduced in the Finance Act, 2025, reflect the government's ongoing efforts to refine the GST framework for better clarity, compliance, and efficiency. The revisions in ITC eligibility, tax adjustments, and reporting requirements ensure more transparency while addressing ambiguities in tax provisions. Taxpayers must stay updated with these changes to align their business operations with the new legal framework and avoid potential compliance issues. As GST continues to evolve, proactive adaptation to these amendments will be crucial for smooth tax administration and business growth.

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