2025: A new chapter in India’s indirect tax laws - Law.asia

the year 2025 has emerged as a game changer in the evolution of India’s indirect tax laws. Although the goods and services tax (GST) landscape has witnessed major changes since the rollout of the GST in 2017, this year marks a decisive shift. On one hand, the government introduced the next-generation reforms, popularly termed as GST 2.0. On the other hand, the GST law witnessed a host of significant amendments and rulings. This article explores some of these changes and their impact on businesses and consumers.

Mixed or composite?

While the country contemplates GST 2.0, one of the thorny issues that has emerged is the distinction between “composite supply” and “mixed supply”, and its tax treatment. Under Indian GST law, a composite supply necessitates two or more supplies of goods or services (or both) that are naturally bundled and supplied in conjunction in the ordinary course of business, one of them being the principal supply and the other being ancillary. By contrast, a mixed supply is defined as two or more individual supplies made for a single price, which does not constitute a composite supply.

The concept of bundled supplies is far from unique to India, as it is widely adopted in many VAT/GST jurisdictions globally such as Australia, Malaysia, the EU and the Republic of Ireland. The definitions and concept of bundled supply are almost common across the globe, except for Malaysia’s GST 2014, where the scope of composite supply is broader as it is not restricted to only ancillary supplies but also includes integral, incidental or tie-in supplies within its ambit.

The tests for ascertaining whether the supplies are naturally bundled, supplied in ordinary course, or are mixed supplies have been provided vide various clarifications in Indian laws, decisions and international jurisprudence, the notable decisions being the Card Protection Plan, Levob Verzekeringen, etc. Some of the indicators prescribed are the nature of goods, perception of the customer, economic divisibility of the goods, etc.

The major distinction between India and global jurisdictions lies not so much in the definition, but in how the tax treatment is framed, and the practical safeguards that are applied. In India, for a composite supply, the entire bundle is taxed at the rate applicable to the principal supply, and for a mixed supply, the entire bundle is taxed at the highest rate applicable to any individual component in the bundle.

To illustrate: If an INR5 (USD0.06) chocolate (18% GST) and an INR50 Lays chocolate (5%) are bundled and sold together for a single price of INR52, the supply will be considered as a mixed supply since the goods are not naturally bundled and can be supplied separately, attracting 18% GST.

Thus, the classification of bundled supplies in India may lead to some truly absurd outcomes, as even a minor ancillary item included in a single-price bundle can tip the supply into the “mixed supply” category and force the entire bundle to be taxed at the highest rate among the items.

Such complexity is less dominant in other jurisdictions for two reasons. First, many countries permit apportionment of taxability for mixed supplies, so that only the taxable portion (rather than the entire bundle) is taxed.

Second, jurisdictions such as Australia have introduced de minimis rules, where the additional items in the bundle are below a prescribed threshold. The taxpayer has an option to treat something as integral, ancillary or incidental even if it is part of a mixed supply, making the rules workable for taxpayers.

Comparing Indian legislation with global practices, in the absence of a sensible, proportional approach and de minimis rules, businesses end up paying the highest tax on the whole bundle simply because one component attracts a higher rate.

The above-mentioned issue has been more alarming for businesses where the GST rate on the main product has been reduced (5%), but the GST rate on promotional offers still remains at 18%, as it would lead to the entire supply being taxed at 18% due to mixed supply provisions.

Given the current tax provisions in India, taxpayers are actively seeking ways to minimise this differential 13% tax burden. One potential area of exploration is whether the nature of a transaction changes when promotional items are provided free of cost and the corresponding input tax credit (ITC) is reversed.

Specifically, can such a supply be considered outside the scope of a “mixed supply”? Legal precedents offer differing interpretations on this matter, so a thorough and cautious analysis is essential before making any decisions.

It is high time the Indian government revisits its GST provisions and adopts a more pragmatic approach to bundled supplies. Clear guidelines are needed to define when supplies are considered “naturally bundled” or “ancillary”. Additionally, introducing a de minimis rule similar to those in other jurisdictions would provide much needed clarity. In the absence of such safeguards, businesses may struggle to structure promotional offers effectively, potentially stifling innovation and increasing legal disputes, rather than simplifying tax administration.

Discount schemes

As part of the GST 2.0 reforms, the treatment of discount schemes is also set to change due to the removal of mandatory conditions requiring the establishment of discounts before the supply, and linking the discounts with original supplies.

This change, although beneficial for the industry, has sparked confusion as to what would qualify as discounts, particularly amid the settled law on the meaning of the term “discounts” in the pre-GST era, which necessitated the requirement of having pre-agreed arrangements.

The industry is also struggling with clarifications issued relating to third-party discounts vide GST circular No. 251/08/2025. The circular has necessitated the requirement of an agreement between the manufacturer and the end customer to supply goods at a discounted price to include the discounts offered by the manufacturer in the taxable value of supplies made by the dealer to the end customer.

International jurisprudence is more or less settled on this aspect, necessitating the taxability of such an amount, the reason being the direct linkage of payment by the manufacturer with the supply between dealer and customer, irrespective of the agreement between the dealer and the customer.

Although the circular seems to deviate from the settled position, it may offer benefits to taxpayers. However, issues such as what will constitute a “valid agreement”, and whether such a scenario would be covered under the third-party consideration, are still open. Without clarification from the authorities, taxpayers may be compelled to seek judicial intervention to resolve these ambiguities.

Parallel proceedings

With the GST law maturing, one of the key challenges faced by taxpayers has been the initiation of multiple proceedings on identical issues by different authorities. These multiple proceedings have hampered business operations and compelled taxpayers to approach higher judicial forums to seek relief.

Since conflicting rulings were given by various high courts, the matter reached the Supreme Court for finality in the case of M/s Armour Security (India) Ltd. The apex court held that the authorities are well within their rights to initiate preliminary actions such as searches, seizures, and the issuance of summons for probing an inquiry until they reach a logical conclusion.

However, once a logical conclusion is reached, which not only includes an order but also a show cause notice, or dropping the matter altogether, no parallel proceedings on the same issue can be initiated.

Despite the clear ruling, authorities (both central and state) continue to inundate taxpayers with parallel notices on identical issues. There are numerous instances where one authority issues a notice even when a show cause notice has already been issued, or a closure letter has been provided for the same issue and for the very same period.

This practice creates unnecessary litigation and also disrupts the routine operations of businesses. It is essential that authorities issue definitive guidelines to prevent such avoidable litigation and ensure procedural consistency.

Conclusion

The recent changes introduced under the GST law, including the phasing out of compensation cess, the reduction of tax slabs, automated refunds, and simplified registration and compliance, clearly reflect the intent of the government to streamline the tax structure. However, it is imperative that the government addresses existing gaps and ambiguities by issuing timely clarifications.

As India continues to integrate with the global economy, aligning its GST law with international best practices would foster consistency and also strengthen investor confidence and global competitiveness.

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