India Overhauls Tax System: New Income Tax Act to Come into Effect April 1, 2025

New Delhi, Dec 25: India has implemented sweeping tax reforms in 2025, including significant GST rate reductions and a higher income tax exemption limit, with the spotlight now shifting to customs duty rationalisation and procedural simplification. The new Income Tax Act, 2025, will come into effect from April 1, replacing the six decade old Income Tax Act, 1961.

Alongside these reforms, the government plans to introduce two new laws to levy additional excise duty on cigarettes and a cess on pan masala, which will be implemented on dates announced by the authorities.

The 2025 tax reforms aim to stimulate domestic demand amid a challenging global economic environment. The GST overhaul, effective September 22, reduced rates on approximately 375 goods and services, addressing long standing concerns about inverted duty structures. The four tier GST system of 5, 12, 18, and 28 per cent has been simplified into two main rates of 5 and 18 per cent, with a 40 per cent levy retained only for sin goods, making the regime simpler and more predictable.

On the revenue front, GST collections touched a record high of Rs 2.37 lakh crore in April 2025, averaging Rs 1.9 lakh crore during the fiscal year. However, following the September rate cuts, collections fell to Rs 1.70 lakh crore in November, reflecting the full impact of the reforms.

For direct taxes, the government raised the income tax exemption limit, leaving more disposable income with middle-income taxpayers. Under the new regime, income up to Rs 12 lakh is tax-free, with the following rates applicable:

5% for Rs 4–8 lakh

10% for Rs 8–12 lakh

15% for Rs 12–16 lakh

20% for Rs 16–20 lakh

25% for Rs 20–24 lakh

30% for income above Rs 24 lakh

Despite the cuts, net non-corporate tax collections grew by 6.37% to Rs 8.47 lakh crore between April and mid-December, while corporate tax collections increased by 10.54% to Rs 8.17 lakh crore. Refund issuance slowed 14% year-on-year to over Rs 2.97 lakh crore due to extra scrutiny on high-value claims.

With major GST and income tax reforms in place, policymakers are now focusing on customs duty rationalisation. Finance Minister Nirmala Sitharaman highlighted the need for simplified, transparent, and digitised customs processes, drawing parallels to the faceless assessments in the income tax system. The government has gradually reduced customs tariffs over the past two years and plans further rationalisation, including eliminating seven additional customs tariff rates on industrial goods in 2025-26, following similar reductions in 2023-24.

Experts stress that the next phase of reforms should focus on end-to-end digitalisation, uniform documentation, predictable classification, and risk based clearances to enhance trade facilitation and investor confidence. A one time amnesty scheme for legacy customs disputes may also be considered to unlock revenue and reduce litigation.

As India enters the next stage of tax reforms, simplification, predictability, and ease of doing business remain central to the government’s policy agenda.