Budget 2026 and Indirect Tax Reform: Compliance Easing Versus Structural Gaps in Indias GST and Customs Framework

Introduction

The Finance Bill, 2026, presented by Union Finance Minister Nirmala Sitharaman on February 1, 2026, introduces targeted structural changes to India's indirect tax landscape, addressing efficiency bottlenecks in the appellate process and expanding customs enforcement reach. These reforms signal the government's intent to resolve operational gaps in the Goods and Services Tax regime and the Customs Act, 1962. The amendments, while incremental in nature, represent a continuation of the government's approach to tax administration reform through piecemeal legislative changes rather than systemic overhaul. However, the modest scope has drawn criticism from tax professionals and industry stakeholders who argue the Bill falls short of addressing deeper systemic issues, particularly mounting legacy litigation and the continued absence of a fully functional National Appellate Authority for GST. This article examines the key indirect tax provisions introduced in Budget 2026, evaluating their potential impact on compliance and litigation reduction while identifying areas where reforms fall short of industry expectations and constitutional imperatives.

Addressing the Appellate Vacuum in GST: A Temporary Legislative Bridge

Amendment to Section 101A of the CGST Act

The Finance Bill proposes inserting sub-section (1A) in Section 101A of the CGST Act, empowering the Central Government, on GST Council recommendations, to authorize an existing Authority or Tribunal to exercise the National Appellate Authority for Advance Ruling's powers pending its formal constitution. This addresses a critical vacuum that has left taxpayers without effective remedy for appeals from conflicting advance rulings issued by State Appellate Authorities under Section 101B since GST's implementation in 2017. The term 'existing Authority' explicitly includes Tribunals through an Explanation clause, suggesting possible designation of the Customs, Excise, and Service Tax Appellate Tribunal or another quasi-judicial body to perform these functions. Effective April 1, 2026, this provision creates an immediate mechanism for resolving appellate disputes. Notably, sub-sections (2) to (13) of Section 101A won't apply where a Tribunal is empowered under sub-section (1A), indicating streamlined procedures distinct from the eventual permanent structure envisioned in the original CGST Act framework.

Institutional Challenges and Judicial Precedents

The Unresolved Question of Permanent Institutional Architecture

Since GST's inception in July 2017, the absence of a dedicated national appellate forum has created jurisdictional inconsistencies and forum shopping, with divergent interpretations across states on identical legal provisions. This has led to a situation where taxpayers in different states receive conflicting advance rulings on the same question, creating uncertainty and inefficiency in tax administration. The Supreme Court in Columbia Sportswear Company v. Director of Income Tax recognized High Courts' constitutional power under Articles 226 and 227 to exercise judicial review over advance rulings, thereby affirming that taxpayers are not without remedy despite statutory limitations on appeals [Columbia Sportswear Company Versus Director of Income Tax, Bangalore - 2012 (8) TMI 105 - Supreme Court]. However, reliance on High Court writ jurisdiction as the primary avenue for challenging advance rulings is neither administratively efficient nor conducive to developing specialized GST jurisprudence, as High Courts lack the focused expertise that a dedicated tax tribunal would provide. The Delhi High Court in Indian Institute of Corporate Affairs v. Delhi Appellate Authority for Advance Ruling established that appeals filed beyond the 60-day limitation period cannot be entertained by the Appellate Authority, even where delay results from the Authority's belated constitution itself, underscoring the urgent need for establishing functional appellate mechanisms to prevent procedural lapses from extinguishing substantive rights [M/s. Indian Institute Of Corporate Affairs Versus Delhi Appellate Authority For Advance Ruling And Ors. - 2023 (4) TMI 965 - DELHI HIGH COURT].

Expanding Customs Jurisdiction Beyond Territorial Waters

Introduction of Section 56A: Fishing and Related Activities

The Finance Bill extends India's customs sovereignty beyond traditional maritime boundaries for specific economic activities through a significant legal development. Proposed Section 56A extends the Customs Act, 1962's jurisdiction beyond territorial waters to regulate fishing and related activities by Indian-flagged vessels operating in the Exclusive Economic Zone and on the high seas. Coupled with amendments to Section 1(2) of the Customs Act and insertion of a comprehensive definition for 'Indian-flagged fishing vessel' in Section 2, this establishes a robust regulatory framework for marine harvesting operations beyond India's 12-nautical-mile territorial limit. The practical implications are transformative for India's marine exports sector. Fish harvested by Indian-flagged vessels beyond territorial waters may be brought into India duty-free, removing customs barriers that previously constrained the competitiveness and profitability of India's marine products industry, which contributes significantly to export earnings. Fish landed at foreign ports may be treated as exports under rules to be framed by the government, enabling Indian fishing enterprises to access international markets directly without incurring duty liabilities or complex re-import procedures. The Central Board of Indirect Taxes and Customs is empowered to frame detailed regulations specifying forms and procedures for declaration, custody, examination, assessment of duty, clearance, transit, and transhipment of marine products harvested in international waters .

Jurisdictional Foundations Under International Maritime Law

The extension of customs jurisdiction beyond territorial waters is firmly grounded in India's sovereign rights under the United Nations Convention on the Law of the Sea, 1982, which grants coastal states exclusive sovereign rights over the natural resources within their Exclusive Economic Zone extending up to 200 nautical miles from the baseline established along the coast. While Section 2(27) of the Customs Act, 1962, traditionally defined 'India' to include only territorial waters extending 12 nautical miles from the coast, the Supreme Court in the landmark case of Kiran Spinning Mills v. Commissioner of Customs clarified that the taxable event of import occurs only when goods physically cross the customs barrier at the port or airport, not merely upon their entry into India's territorial waters [KIRAN SPINNING MILLS Versus COLLECTOR OF CUSTOMS - 1999 (8) TMI 82 - Supreme Court]. Section 56A effectively extends this conceptual customs barrier to the outer limits of the Exclusive Economic Zone for the specific purpose of regulating fishing activities, thereby harmonizing customs law with India's broader maritime zones framework as established under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, which recognizes India's jurisdiction over resources in the EEZ while respecting international law principles of freedom of navigation.

Penalty Recharacterization and Advance Rulings Extension

Section 28(6) of the Customs Act is amended to clarify that penalties paid under sub-section (5) during determination shall be deemed charges for non-payment of duty rather than standalone punitive fines. This distinction affects accounting treatment, tax credit availability, and appellate proceedings. The Finance Bill also extends advance rulings validity from three to five years under Section 28J(2), with the Authority empowered to extend existing rulings for another five years upon request. By increasing ruling lifespans, the amendment reduces re-application frequency, minimizing litigation and administrative friction while preserving government flexibility to respond to evolving policies through change-in-law caveats.

GST Refunds, Warehouse Simplification, and Compliance Easing

Section 67 of the Customs Act is substituted to allow warehoused goods transfers between warehouses without prior officer permission, subject to prescribed conditions. This procedural simplification acknowledges the impracticality of requiring case-by-case approvals for routine logistical operations and aligns with the government's broader 'ease of doing business' agenda, eliminating bureaucratic delays while maintaining regulatory oversight through mandatory record-keeping and intimation requirements. Section 54(6) of the CGST Act is amended to extend provisional refunds at ninety percent to inverted duty structure cases arising under Section 54(3)(ii), addressing severe liquidity constraints affecting sectors like textiles, pharmaceuticals, and renewable energy manufacturing where input taxes systematically exceed output taxes due to rate differentials in the GST structure. This amendment implements recommendations from the 56th GST Council Meeting held in September 2025 and operates on a risk-based assessment model designed to prevent fraudulent claims while ensuring genuine taxpayers receive timely refunds. Section 54(14) removes the thousand-rupee minimum threshold for export refunds, benefiting small and micro exporters using courier and postal modes who previously faced disproportionate administrative costs relative to refund amounts. These measures collectively improve working capital management and promote MSME international trade participation.

Sections 15 and 34 of the CGST Act are amended to ease post-sale discount treatment by removing requirements for pre-agreed arrangements and specific invoice linking. Suppliers may issue credit notes for post-sale discounts if recipients reverse corresponding input tax credit, addressing challenges in distributor-retailer models, volume rebates, and performance-based discounts. This shift recognizes commercial realities while maintaining tax neutrality through mandatory ITC reversal. Section 13(8)(b) of the IGST Act is omitted, aligning intermediary services' place of supply determination with the default rule under Section 13(2)—the recipient's location. This resolves ambiguity surrounding intermediary services to foreign entities, allowing qualification as service exports and removing compliance burdens on Indian providers in global value chains.

Critical Assessment: Incremental Reforms Versus Systemic Overhaul

While establishing frameworks for administrative continuity, these reforms fall short of addressing broader structural demands. The absence of amnesty or settlement schemes for legacy tax litigation represents a missed opportunity—indirect tax disputes worth lakh crores remain pending across appellate and judicial forums, consuming resources while creating taxpayer uncertainty. The GST Appellate Tribunal's non-operationalization since 2017 continues burdening High Courts with technical tax disputes better suited for specialized adjudication, leading to delays and inconsistent jurisprudence. The Supreme Court in Madras Bar Association v. Union of India emphasized functional tribunals' necessity for expeditious tax justice. The Bill doesn't address reducing pre-deposit requirements for appeals—currently ten percent for first appeals and twenty percent for second appeals—disproportionately affecting SMEs with limited working capital, effectively denying justice where tax demands are arguable but substantial.

Conclusion

Budget 2026's indirect tax reforms represent tactical improvements to specific GST and Customs administration pain points but lack strategic vision for litigation reduction and institutional strengthening. Temporary authorization of existing authorities for advance ruling appeals provides immediate relief while perpetuating uncertainty surrounding permanent appellate architecture. Extension of advance ruling validity and refund process simplification enhance operational efficiency without addressing fundamental challenges of tax certainty, dispute resolution capacity, and legacy litigation burden constraining India's indirect tax ecosystem. As India aspires toward global manufacturing and services hub status, the need for stable, predictable, and efficient indirect tax frameworks becomes increasingly critical, demanding bolder reforms than those proposed in the Finance Bill, 2026.

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Adv. Aaditya Bhatt and Adv. Chandni Joshi

* The author is a legal scholar specializing in indirect taxation and fiscal policy. This article represents an independent analysis of India's indirect tax reforms introduced in the Union Budget 2026-27.