The application of Goods and Services Tax (GST) to scrap sales frequently causes confusion among suppliers, traders, and manufacturers involved in recycling. Key areas of misunderstanding often revolve around valuation and the tax implications for various scrap materials. This article clarifies the impact of GST on scrap transactions, including applicable Harmonized System of Nomenclature (HSN) codes and tax rates.

Defining Scrap Materials

Scrap consists of waste materials that typically hold no direct economic value. However, items like plastic, paper, metal, rubber, or wood scraps gain value through recycling. Suppliers gather these waste products from manufacturing sites and landfills, then sort and sell them to recyclers. Recyclers compensate suppliers, deducting Tax Collected at Source (TCS) as per the Income Tax Act. The inherent value of scrap depends on its recoverable components, which are then repurposed for manufacturing. Under the GST Act of 2017, scrap is not specifically defined but is considered a taxable supply, removing the need for a 'manufacturer' or 'marketability' test. GST is imposed on the invoice value of scrap supplies. Additionally, buyers who purchase scrap from dealers are mandated to deduct TCS at a 2% rate on payments exceeding Rs 2.5 lakhs. This TCS applies to the total invoice value, including GST.

GST Implications for Scrap Transactions

Scrap dealers must carefully consider several aspects when dealing with scrap supplies:

• The Goods and Services Tax (GST) rate on scrap sales varies based on the materials involved, frequently leading to disagreements between dealers and tax authorities. For instance, most metal scraps are subject to an 18% GST rate, whereas wood, glass, paper, and rubber scraps are taxed at 5%. For more details, refer to applicable GST rates.
• The Reverse Charge Mechanism (RCM) applies to scrap supplies, particularly because many scrap dealers operate within an unorganized sector with numerous unregistered suppliers. The GST Act, 2017, enables RCM, shifting the obligation of tax collection and remittance to the government from the supplier to the recipient or buyer. Registered buyers must issue a self-invoice for such transactions. Learn more about the Reverse Charge Mechanism.
• Regarding Input Tax Credit (ITC), registered scrap dealers can claim ITC on their tax liabilities for business expenses, except when the RCM scheme is applied. Under RCM, buyers responsible for paying GST are entitled to claim the corresponding ITC. Information on ITC claims is available.
• The Tax Deducted at Source (TDS) mechanism is relevant for scrap supplies exceeding Rs 2.5 lakh between registered dealers and buyers. Buyers are required to deduct 2% TDS from payments to suppliers and provide TDS certificates. Suppliers can then utilize this TDS credit to offset their GST liabilities. Explore TDS on supply of scrap.

GST Rates and Harmonized System of Nomenclature (HSN) Codes for Scrap

GST on scrap sales varies depending on the material composition. The following table outlines the HSN codes for common scrap materials along with their applicable GST rates:

Calculating GST on Scrap Transactions

Scenario 1: A scrap dealer supplies plastic waste valued at Rs.40,000.

• The total supply value is Rs.40,000.
• The applicable GST rate for HSN code 3915 (plastic waste) is 18%.
• The tax to be collected is Rs.40,000 * 18% = Rs.7,200.
• The total invoice value, including GST, amounts to Rs.40,000 + Rs.7,200 = Rs.47,200.

Scenario 2: Mr. Talwar, an unregistered scrap supplier, delivers 10,000 kg of iron scrap and waste at Rs 10 per KG to ABC Foundry Pvt Ltd.

• The total value of the supply is (Rs 10 * 10,000) or Rs 1,00,000.
• The GST rate for iron and mild steel scrap is 18%. Since Mr. Talwar is not GST registered, the GST liability is determined by the Reverse Charge Mechanism (RCM). In this case, the buyer, ABC Foundry, is responsible for remitting GST at the applicable rate to the government.
• GST payable by ABC Foundry = (Rs 1,00,000 * 18%) or Rs 18,000.
• ABC Foundry will issue a self-supply invoice for the scrap's value and record the GST payable.
• However, ABC Foundry is also eligible to claim Input Tax Credit for the same amount, resulting in a net cash outflow of zero.

Impact of GST on Scrap Dealers

The introduction of GST has brought several changes to the scrap sales business, many of which are beneficial, alongside a few challenges:

• A significant advantage of GST for the scrap industry is the simplified process for claiming Input Tax Credit (ITC). Recyclers and smelters now find it much easier to offset their tax liabilities with available credits.
• GST has contributed to the formalization of the scrap business by standardizing indirect taxation. This has fostered greater transparency in business operations and enhanced access to financing options.
• The Reverse Charge Mechanism (RCM) under the GST Act simplifies transactions for small dealers. It permits registered buyers and large manufacturers to pay GST directly for supplies received from unregistered sellers, thus alleviating the compliance burden on smaller scrap dealers.
• A potential cash flow issue arises under RCM, as large smelters and recyclers must pay GST for purchases from unregistered suppliers.
• The implementation of GST has led to more stringent tax compliance requirements, which can result in increased costs for both registered scrap dealers and buyers.