Highlights
- The Union Budget 2025-26 introduces significant exemptions under Basic Customs Duty to rationalize tariff structure, promote domestic manufacturing, and facilitate trade.
- A new Interim Board for Settlement will be created under the Customs Act, 1962, consisting of three senior officers, marking a shift from judicial to executive functions in the settlement process.
- The classification criteria for Micro, Small and Medium Enterprises will be revised, with thresholds increased by 2 to 2.5 times, impacting compliance requirements and payments to MSME vendors.
The Union Budget 2025-26 introduces major exemptions under Basic Customs Duty (BCD) to rationalize tariff structure and address duty inversion. The proposals are set to support domestic manufacturing and value addition while promoting exports, facilitating trade, and providing relief to common people.
“My proposals relating to Customs aim to rationalize tariff structure and address duty inversion,” said Union Finance Minister Sitharaman on February 1.
Delivering on the promise to review the customs rate structure announced in July 2024, the Budget proposes removing seven customs tariff rates for industrial goods over and above those removed in Budget 2023-24. This will leave only eight tariff rates, including the ‘zero’ rate.
The Budget also proposes to levy not more than one cess or surcharge. Therefore, the proposal to exempt the Social Welfare Surcharge on 82 tariff lines is subject to a cess.
The Union Budget flagged the issue of the non-existence of any time limit to finalize Provisional Assessments under the Customs Act, 1962 leading to uncertainty and cost to trade. To promote ease of doing business, a time limit of two years was fixed, extendable by a year, for finalizing the provisional assessment.
Interim Board for Settlement
The Union Budget proposes the insertion of a new clause after clauses (d) and (e) of section 127A to define the Interim Board, Members of the Interim Board, and pending applications.”Budget 2025 proposes a significant shift in the settlement scheme under the Customs Act, 1962 with the creation of an Interim Board for Settlement,” said V. Lakshmikumaran, Founder & Managing Partner, Lakshmikumaran & Sridharan Attorneys.
“The Board will consist of three senior officers, all of the rank of Chief Commissioner or above, nominated by the Central Board of Indirect Taxes and Customs,” he highlights.
Notably, this Board will operate without judicial members, marking a departure from the previous structure of the Settlement Commission. This change signifies a shift of the settlement process from a judicial to an executive function.V. Lakshmikumaran, Founder & Managing Partner, Lakshmikumaran & Sridharan Attorneys.
MSME Clarification
The Union Budget 2025 recommends revision in classification criteria for MSMEs, enhancing to 2.5 and 2 times, respectively, for achieving higher efficiencies of scale, technological degradation, and better access to capital. “The threshold for MSME classification is proposed to be raised by 2 – 2.5 times and this could have an impact on payments to MSME vendors,” said L. Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys
“Under MSME Act, there is a requirement to make payment to MSME within 45 days. The classification impacts compliance requirements in relation to penalty and income tax deductions. It will be interesting to see how this change would be implemented,” he added.
Classification Dispute
The classification dispute often leads to litigation. The major classifications include revision in classification criteria for MSMEs and classification in the Telecommunication sector.
The Union Budget 2025 proposes a reduction in the basic customs duty from 20% to 10% on carrier-grade ethernet switches to make it at par with Non-carrier-grade ethernet switches to prevent classification disputes.”This rate adjustment reflects a proactive approach to addressing industry concerns and reducing tax litigation,” said Manmeet Kaur, Partner at Karanjawala & Co.
These proposals suggest rate rationalization, classification, and structural reforms to address the concerns of industry and common people through promoting ease of doing business and reducing litigation, and facilitating trade.
