Scrap steel industry seeks ‘reverse charge mechanism’ in GST

Reverse charge means the liability to pay tax is on the recipient of supply of goods or services

The scrap steel industry, which sources its raw materials mostly from unorganised scrap dealers, has sought rationalisation in GST structure through a ‘reverse charge mechanism’ where the liability to pay tax would be on manufacturers.

All India Induction Furnaces Association (AIIFA), a body of scrap steel manufacturers, on Thursday urged the GST Council to consider their demands for bringing the steel scrap recycling industry under a reverse charge mechanism in line with the transport services.

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Under the Goods and Services Tax (GST) system, generally, the supplier of goods and services is liable to pay tax. Reverse charge means the liability to pay tax is on the recipient of the supply of goods or services.

Sudhir Goyal, a member of All India Induction Furnaces Association, said, “a large number of scrap dealers have been found guilty of claiming fraudulent input tax credit. Tax authorities ultimately catch manufacturers.”

Goyal said the reverse charge mechanism would help solve the issue of fraudulent input tax credit claims by scrap dealers. GST is levied at a rate of 18 per cent on steel scrap.

AIIFA recommendations to the GST council include exempting the supply of metal scrap from GST when it is sold by various scrap dealers, except for the last leg of the chain when it is sold to manufacturers. In that case, the GST would be collected from the manufacturers through a reverse charge mechanism, where the manufacturers would be responsible for paying the tax rather than the scrap dealers.

The association has also suggested the introduction of separate entries in the GST schedules and HSN (Harmonised System of Nomenclature) codes for the old scrap and new scrap.

Old scrap is already taxed at the time of the original product's sale and the reverse logistics involves only collection and reuse. New scrap, however, is generated from a definite economic activity. Therefore, the two types of scrap should not be treated equally from a tax perspective, the association said in a statement.

Union Steel Minister Jyotiraditya Scindia earlier this month said around 22 per cent of steel in India is produced through recycling. The government has set a target to increase the share of steel produced through recycling to 50 per cent in overall steel production in the country.

“The current GST system is resulting in a lot of litigation and making doing business very difficult. Reverse charge mechanism will lead to increase in revenue to the government as it will help plug leakages and it will save us from unnecessary litigation,” said Mohinder Gupta, President of Induction Furnace Association Mandi Gobindgarh, Punjab.

Danish Goyal, AGM (Sales & Marketing) of Punjab-based Madhav KRG Limited, said a lot of local scrap dealers bill scrap on fraudulent GST bills, collecting GST from manufacturers along with the material bill, but not depositing the funds with the department.

There is currently no mechanism available on the GST portal to verify the deposit of GST or the authenticity of bills. As a result, frequent raids and notices from tax authorities are sent to manufacturers seeking details of scrap purchased from scrap dealers, Goyal said.