Karnataka Amends GST Act, Introduces Track and Trace Mechanism and Clarifies ITC Rules

The Karnataka Legislative Assembly passed The Karnataka Goods and Services Tax (Amendment) Bill, 2025 (LA Bill No. 57 of 2025), which will become The Karnataka Goods and Services Tax (Amendment) Act, 2025, further modifying the Karnataka Goods and Services Tax Act, 2017. This amendment Act aims to address various operational difficulties encountered under the existing tax regime and streamline several provisions. The new Act will come into force on a date to be appointed by the Government through a notification in the Official Gazette, with certain provisions having retrospective effect.

Key changes introduced by the amendment Act include revisions to definitions, modifications to input tax credit (ITC) rules, adjustments to credit note provisions, and the establishment of a new track and trace mechanism for specific goods. The definition of "Input Service Distributor" (ISD), an office that receives tax invoices for input services and distributes the credit to other units of the same entity, was expanded to explicitly include inter-state supplies where tax is paid on a reverse charge basis (where the recipient, rather than the supplier, is liable to pay the tax). This particular amendment is deemed to have been inserted with effect from April 1, 2025. Furthermore, the Act clarifies the scope of "local authority" by defining "local fund" and "municipal fund" within the context of civic functions and tax levying powers. A new definition for "unique identification marking" was also inserted, describing it as a unique, secure, and non-removable digital stamp or mark, crucial for the implementation of the track and trace mechanism.

The legislation also omits sub-sections (4) of sections 12 and 13 of the Principal Act, thereby removing the provisions for the time of supply concerning transactions in vouchers, recognizing that vouchers are neither a supply of goods nor services in themselves. A significant retrospective amendment, effective from July 1, 2017, clarifies the input tax credit eligibility under section 17(5)(d). The phrase "plant or machinery" has been substituted with "plant and machinery" to remove ambiguity regarding the availability of ITC for goods or services used in the construction of immovable property. The legislation provided: “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".” This clarification aims to settle past disputes and ensure consistent interpretation.

Further amendments include revised conditions for reducing output tax liability through credit notes under section 34(2), requiring the recipient to reverse the corresponding input tax credit if availed, or ensuring the incidence of tax has not been passed on to any other person. Section 38, pertaining to the communication of inward supply details and input tax credit, was amended to remove the term "auto-generated" from the statement of input tax credit, making the provision more inclusive and allowing for the prescription of other details. Section 39(1) was also modified to enable the government to prescribe conditions and restrictions for filing returns. In appellate procedures, the Act introduces a pre-deposit requirement for appeals against orders demanding only a penalty without any tax demand. For appeals before the Appellate Authority (section 107) and the Appellate Tribunal (section 112), a sum equal to ten percent of the penalty amount must be paid by the appellant.

A new section 148A was inserted, empowering the Government to notify specific goods and persons for whom a track and trace mechanism will be implemented. This mechanism involves affixing unique identification markings on goods or packages and electronically storing and accessing related information. Non-compliance with this mechanism will attract a penalty under the newly inserted section 122B, which stipulates a penalty equal to one lakh rupees or ten percent of the tax payable on such goods, whichever is higher. Additionally, Schedule III of the Principal Act was amended retrospectively from July 1, 2017, to clarify that the supply of goods warehoused in a Special Economic Zone (SEZ) or a Free Trade Warehousing Zone (FTWZ) to any person before clearance for exports or to the Domestic Tariff Area (DTA) shall be treated as neither a supply of goods nor a supply of services. This amendment also specifies that no refund will be available for tax already collected on these activities. The legislative intent behind these changes is to enhance tax compliance, reduce litigation arising from interpretational ambiguities, and introduce robust mechanisms for monitoring the supply chain of specified commodities, thereby strengthening the overall Goods and Services Tax framework in the state.

Keywords: Karnataka GST Amendment, Goods and Services Tax, Input Tax Credit, Track and Trace, Tax Compliance, Legislative Amendment, SEZ, FTWZ, Penalty, Appellate Authority

Geo Tags: India, Karnataka District: Not Applicable