GST on Scrap Sale: Tax Rate, HSN Code and Guidelines

GST on scrap sale often creates confusion among scrap suppliers, traders and manufacturers recycling these materials. The major causes of contention are the valuation of supply and tax implications on different types of materials in scraps. This article discusses the GST impact on scrap sales, scrap HSN codes and the applicable GST rate on the sale of scrap. 

What is the Meaning of Scrap?

Scrap is anything that is wastage, useless and lacks any tangible economic value. However, in practice, scraps, especially those containing plastic, paper, metal, rubber or wood, are valuable when recycled. Scrap suppliers typically collect waste from manufacturers’ sites, dumping grounds, and clean and sort it, then sell it to recyclers. Recyclers make payment for the supply after deducting TCS (Tax Collected at Source) under the Income Tax Act.

Economically valuable materials are extracted and reused further in manufacturing. The value of scrap fluctuates based on the usable materials it contains. It is the reason that, during the regime of the central excise duty, the taxability of scraps used to depend on the ‘manufacturer’ or ‘marketability’ test. 

The GST Act, 2017, does not define scrap but has made the supply of all scrap types taxable. Scraps are no longer required to go through a taxability test at the manufacturer’s point. GST is levied on the invoice value of the supply. Along with GST, buyers purchasing scraps from dealers are also required to deduct TCS at 2% rate on the total payment made to scrap dealers for supplies exceeding Rs 2.5 lakhs. It is crucial to remember that TCS is applicable to the invoice value, inclusive of GST. 

Treatment of Scrap Sales under GST

Scrap dealers need to be careful about the following issues while supplying scraps. 

• Applicable GST rate - GST rate varies significantly with the materials in the supplied scrap. It often creates a lot of contention between dealers and tax officers. For example, the majority of metal scraps are taxed at a uniform 18% rate, while wood, glass, paper and rubber scraps are taxed at 5%. 
• Reverse Charge Mechanism (RCM) - Scrap dealers work primarily as an unorganised industry comprising a multi-layered network of suppliers. Many of them are unregistered. So, the GST Act, 2017, allows the provision of RCM for the supply of scraps. As per the RCM provision, the responsibility of tax collection and payment of collected tax to the government lies with recipients or buyers. For this purpose, registered buyers are required to issue a self-invoice. 
• ITC claim for scrap dealers - Except under the RCM scheme, registered scrap dealers are eligible to claim ITC on their tax liabilities for expenses related to their scrap business. For the RCM scheme, buyers paying taxes are eligible to claim ITC.  
• TDS on supply of scrap - TDS is applicable for the supply of scrap exceeding Rs 2.5 lakh between registered dealers and buyers. Buyers deduct 2% TDS from payment to suppliers (scrap dealer) and issue TDS certificates in exchange. Dealers can claim credit for TDS paid and adjust the same against their GST liability.  

GST Rates and HSN Code for Scrap Materials

GST on the sale of scrap varies with the materials it contains. Here is the list of HSN codes for scrap sales along with applicable tax rates. 

GST Calculation on Scrap Sale

Scenario 1 - 

Assume a scrap dealer supplies plastic waste worth Rs.40,000. 

• The supply value is Rs.40,000
• GST rate applicable is 18% for HSN code 3915
• The tax to be collected = Rs.40,000*18% = Rs.7200 
• Total invoice value inclusive of GST = Rs.40,000 + Rs.7200 = Rs.47,200

Scenario 2 - 

Assume Mr Talwar is an unregistered scrap supplier. He delivers 10000 kg of iron scrap and wastage at a rate of Rs 10 per KG. The buyer is ABC Foundry Pvt Ltd. 

• Total value of supply is (Rs 10 * 10000) or Rs 1,00,000. 
• The applicable GST for iron and mild steel scrap is 18% 

However, Mr Talwar is not GST registered. So, the liability of remitting GST to the government is decided based on RCM (Reverse Charge Mechanism). In this example, the buyer ABC Foundry will be liable for paying GST at the applicable rate to the government account. 

• GST payable by ABC Foundry = (Rs 1,00,000*18%) or Rs 18,000. 
• ABC Foundry issues a self-supply invoice for the supply value of the scrap and records the GST payable in that invoice. 
• However, ABC Foundry is also eligible to claim the input tax credit of the same value. So, net cash outflow will be zero. 

GST Implications for Scrap Dealers

The introduction of GST has impacted the business of scrap sales in several ways. Many of them are positive, although there are a few hurdles. 

• Ease of claiming ITC - This is one of the biggest benefits of GST in the scrap business. For recyclers and smelters, claiming tax credits against their GST liability has become a lot easier. 
• Formalisation of the business - GST has streamlined indirect taxation for the scrap dealing business. It has made the business process transparent and opened up financing opportunities. 
• Ease of business for small dealers - Reverse charge mechanism under the GST Act allows registered buyers and large mills to pay GST upfront for supply from unregistered sellers. It has relieved small scrap dealers from the burden of tax compliance. 
• Cash flow concern - Under RCM, large smelters and recyclers are required to pay GST for purchases from unregistered suppliers. This creates a cash flow concern. 
• Stringency in tax compliance - Since the introduction of GST, compliance with indirect tax regulations has become a lot more stringent, increasing costs for registered scrap dealers and scrap buyers.