1. INTRODUCTION

We will be discussing a vibrant topic in interest of our nation and off course when we talk of nation the interest of public at large itself gets part of it, since, it is the public who make a nation. All the three elements considered into discussion are an important part of the “Swachh Bharat Abhiyan” a noble initiative by our Hon’ble Prime Minister, which is need of time, sincerely, “we owe this earth to coming generations“. It is our liability and responsibility, being custodians of this planet Earth, to preserve its resources for the future.

2. IMPORTANCE OF THE SUBJECT

The first reason behind choosing the topic “making GST friendly in interest of revenue, recyclers and ragpickers” have something in common:

(a) Revenue: when we talk about Goods and Service Tax (GST) it is synonym of revenue generator to the Government, 

(b) Recyclers: the recyclers or the manufactures are the one when manufacture or produce, the revenue is generated in the form of taxes and off course a lot of employment, and when these employees make expenses again revenue is generated, it is a cyclic form,

(c) Rag pickers: largely unrecognized and ignored more than 4 million in number generating raw material for the recyclers and with revenue, supporting at large the India’s circular economy. 

The second reason behind choosing the topic is the correlation of all the three in safeguarding the environment which has become need of time. Climate change significantly increases the frequency and intensity of natural disasters, particularly extreme weather events like heatwaves, wildfires, droughts, floods, and intense storms. This is caused by rising global temperatures, which warm the atmosphere and oceans, affecting the water cycle, melting ice, and intensifying weather systems.

A. The Connection to Climate Change

(a) Greenhouse Gases: The human-caused increase in greenhouse gases from burning fossil fuels traps heat, warming the planet and its oceans.

(b) Warming Oceans and Atmosphere: This warming affects the water cycle and weather patterns, making extreme weather more prevalent.

(c) Melting Ice: The melting of land ice contributes to sea level rise, increasing the risk of coastal flooding during storm surges.

(d) Increased Water Vapor: Warmer air holds more moisture, fuelling more intense storms and heavier rainfall.

B. Social and Environmental Impacts

(a) Loss of Life and Property:These disasters lead to increased death, injury, and displacement.

(b) Economic Burdens:They place a huge burden on societies and economies due to destruction and repair costs.

(c) Environmental Damage: Ecosystems are harmed, and critical freshwater ecosystems are impacted.

C. Recycling conserve resources:

Recycling significantly saves natural resources by reducing the demand for extracting new raw materials like trees, minerals, and fossil fuels, which conserves ecosystems and wildlife. The recycling conserves specific resources:

(a) Forests and Trees:Recycling paper significantly reduces the number of trees that need to be cut down to produce new paper products.

(b) Minerals and Ores: Recycling metals such as steel and aluminium decreases the need to mine new ores and minerals, conserving these finite resources.

(c) Fossil Fuels and Petroleum:Many plastics are made from petroleum, so recycling plastic reduces the demand for fossil fuels.

(d) Water:The extraction and processing of raw materials consume vast amounts of water. Recycling materials like steel reduces water consumption by a significant margin, according to the U.S. Environmental Protection Agency (EPA).

(e) Sand, Soda Ash, and Limestone: Recycling glass reduces the need to extract raw materials like sand, soda ash, and limestone, which are used to create virgin glass.

D. Recycling Matters

(a) Protects Ecosystems: Less extraction means less damage to forests, mines, and other natural habitats, which helps preserve biodiversity and wildlife.

(b) Reduces Pollution: Extraction, refining, and processing of raw materials generate significant air and water pollution. Recycling decreases these activities, leading to cleaner air and water.

(c) Saves Energy: Manufacturing products from recycled materials almost always requires less energy than making them from virgin resources. For example, recycling aluminium uses 95% less energy than producing it from bauxite ore.

(d) Promotes Sustainability: By conserving resources and reducing waste, recycling helps ensure that these valuable materials are available for future generations.

E. Common categories of recycling

(a) Plastic Recycling: Processing plastic waste into reusable materials.

(b) Paper Recycling: Converting waste paper into new paper products.

(c) Metal Recycling: Recycling scrap metals like iron, aluminium, and copper.

(d) E-waste Recycling: Handling electronic waste to extract valuable components.

(e) Glass Recycling: Reprocessing glass products for reuse.

(f) Organic Waste Recycling: Composting organic materials for agricultural use.

3. Goods and Services Tax (GST)

India’s Goods and Services Tax (GST), introduced in 2017, marked a revolutionary tax reform by consolidating 17 indirect taxes into a unified framework. Its implementation aimed to simplify taxation, promote economic cohesion, and eliminate compliance complexities. However, as businesses and taxpayers adapted to the new regime, various disputes emerged over interpretation, application, and compliance. GST litigation has since become an integral part of India’s tax landscape, necessitating a comprehensive understanding of the legal framework, key challenges, and effective dispute resolution mechanisms.

A. GST impact on recycling

(a) Due to the fragmented nature of the scrap collection system in India, many people struggle to understand the GST mechanism, leading to non-compliance or tax evasion.

(b) GST in India primarily impacts recyclers by imposing an 18% tax on scrap materials like plastic, e-waste, and metal, which creates a significant financial burden, drives the informal trade sector, and hinders the formalization of India’s circular economy.

(c) However, Input Tax Credit (ITC) can be claimed on the GST paid on scrap, helping to offset costs for registered recyclers, but there are lot of hinderances and later impacts which we will discuss gradually.

(d) A recent study suggests that lowering GST rates to 5% on waste materials is crucial to boosting formalization, reducing government revenue loss, and strengthening the circular economy. 

B. Higher Rate GST on scrap, a negative impact on Revenue

(a) High Tax Burden: A majority of scrap materials, including plastic, e-waste, and industrial by-products, are taxed at 18% under GST. This high rate increases costs, especially for smaller recyclers, making formal recycling economically unviable.

(b) Growth of Informal Sector: The 18% GST rate pushes many small dealers to avoid the formal system, leading to a dominance of informal, cash-based trade in scrap and e-waste, which accounts for around 90% of transactions.

(c) Revenue Loss for Government:

(i) Minister of State for Finance Mr. Pankaj Chaudhary has said that in the last five fiscal years (2020-21 to 2024-25), total GST evasion detected by Central GST (CGST) field officers stood at about Rs 7.08 lakh crore in 91,370 cases. Taxes recovered during the period by way of voluntary deposit stood at over Rs 1.29 lakh crore. The evasion data includes input tax credit (ITC) fraud of about Rs 1.79 lakh crore in 44,938 cases between FY21 to FY25.

(ii) The shift towards the informal sector results in significant government revenue losses, with one report estimating these losses to be ₹65,000 crore annually, with potential to rise to ₹86,700 crore by 2035.

(d) Hinders Circular Economy: High GST rates on waste materials create a disincentive for waste recycling, undermining India’s circular economy goals, such as increasing the use of recycled steel from scrap.

(e) High GST rates an attraction for tax evaders: The fraud involves creating bogus firms and invoices to claim ITC without actual goods exchange, leading to significant revenue loss for the government and harassment of legitimate manufacturers.

(f) Impossible to track revenue: It is impossible to track revenue leakage through human surveillance and the ITC fraud cases being booked in the country are just the tip of the iceberg. Further, whatever cases are booked, most of the evasion noticed remains unpaid to the government. The cases being booked in the sector are not even 5% of the revenue leakage.

(g) Engagement of Government machinery: A good number of Government staff is involved in scrutinizing the transactions, movement of vehicles, conducting surveys and raids, after that a marathon exercise in checking the documents, conducting audits and so on.

(h) Unwanted litigations:

(i) Input Tax Credit (ITC) Denials – Discrepancies in invoices or supplier non-compliance leads to ITC disputes.

(ii) Classification and Valuation Issues – Misclassification of goods/services under different tax slabs leads to varying tax liabilities.

(iii) Tax Compliance and Penalties – Non-compliance with return filings, documentation, or e-way bill requirements may result in penalties.

(iv) GST Refund Claims – Refunds related to exports or inverted duty structures may be rejected due to procedural lapses or mismatched filings.

(v) Assessment and Audit Discrepancies – Tax assessments conducted by authorities may lead to litigation if taxpayers contest findings.

(vi) E-Way Bill Violations – Non-generation, incorrect details, or expiration of e-way bills can result in penalties, detention of goods, or seizure, leading to disputes.

C. Higher Rate GST negative impact on Recyclers

(a) Wrong deeds of scrap suppliers: Print media as well as internet is flooded with ITC (input tax credit) related fraud cases in GST regime, scrap recyclers are pressurized and stressed with series of investigations even though most of them are not at fault. They are being penalized and even arrested for the wrong deeds of their scrap suppliers.

(b) Source of rampant corruption: The uniqueness of the commodity on the one hand leads to loss of legitimate revenue and on other hand it becomes a source of rampant corruption in the tax department coupled with torture and harassment of manufacturing units for all wrong reasons.

(c) Non-holistic way of department: The recycler units are under tremendous pressure. When the investigating teams visit, they do not look at the problem in a holistic way and for them the ineligible credit has been injected into the credit Chain and it has reached to manufacturing unit and therefore they are resorting to all investigation tactics such as search, summon and arrest and coercing manufacturing units to pay the tax which is never due from them. This is killing the vibrant recycling manufacturing industry.

(d) Fake ITC with constant threat of arrest: The business entities all over India are perturbed with high handedness of GST authorities with respect to investigation termed as “fake ITC”. The officers are not differentiating between wrong doer and honest tax payer and in the process arm-twisting the business entity which has got permanent establishment and who creates employment in the country. The investigations being done under constant threat of arrest with abusive procedures is killing the golden goose which pays the tax and creates employment and is retarding the economy.

(e) Absconding traders’ penalization of recyclers: The stress being faced by manufacturing units, who are actually eligible for credit as they have actually received the goods along with invoice and supplier has filed GSTR 1 and GSTR 3B. Manufacturers have also discharged output tax liability on manufactured goods corresponding to inputs received. Their output supply is not disputed by department. Since traders run away and manufacturers with fixed establishment cannot run away, revenue authorities are chasing manufacturers and trying to penalize them for the malpractices of traders. This is killing manufacturing sector which creates huge employment.

(f) Undue pressure to pay the credit involved: A large number of investigations are being carried out by DGGI and Preventive teams. Manufacturing units who have got fixed establishments are being pressurized to pay the credit involved using DRC-03, even though there is no fault on their part. The investigating agencies are using threat of arrest and threat of attaching properties including freezing of bank accounts in case of refusal to pay.

(g) Unfair competition: Business complying with tax laws face unfair competition from fraudulent entities that reduce their tax burden illegally.

(h) Tighter and cumbersome scrutiny of the department:

(i) More GSTR-3B to GSTR-2B reconciliation queries,

(ii) ITC delay if supplier is flagged by DGGI,

(iii) ITC blocking under Rule 86A, even if later reversed, Show Cause Notices under section 73 and 74

(iv) Show Cause Notices under section 73 and 74

D. Higher Rate GST negative impact on Ragpickers

(a) Impact on Informal Sector: The approximately four million people working in India’s informal recycling sector, including many ragpickers, were disproportionately affected, as their already precarious livelihoods were further squeezed.

(b) Reduced Ragpicker Income: The increased tax burden on recycled products made the recycling industry less profitable, forcing plastic recyclers and dealers to cut the prices they paid for waste. This directly decreased the income of ragpickers, who already operated on very thin margins.

(c) Decreased Demand for Waste: The high GST rates made recycled products less competitive, leading to lower demand in the market for these materials.

E. Scrap traders and their Modus Operandi to evade taxes

Tax traders use a variety of sophisticated and long-standing fraudulent practices to avoid duties, evade taxes, and finance illegal activities. These schemes cause massive financial losses for governments and legitimate businesses dependent on scrap recycling. 

Modus Operandi	Description
Bogus Invoices	No actual supply; only invoice raised for claiming ITC
Bogus Firms & Registrations	Registration of shell firms to conduct fake transactions and claim refunds on its basis
Aadhaar-linked Registrations	Fraudulent GSTINs obtained using fake credentials
Circular Trading	Goods move in a loop only on paper to inflate tax credits and reduce overall tax payments
Layering of Entities	Shell firms used to route invoices one to another so that there is layering its detection becomes cumbersome
Misclassification of goods	To take advantage of lower tax rates, misclassification of high tax goods is done in low tax categories
Underreporting of sales	To reduce the GST liability involving falsifying invoices or omitting transactions
Setting off ITC of different HSN	Ex Paper ITC settled with glass ITC
Non-payment of tax on supplies	Non-payment of tax on supply of taxable goods and services

(a) Tax and customs evasion

(i) Circular trading (or “bill trading”): Traders create fictitious “ghost” companies and shell firms that engage in fake trades with each other, passing invoices around a closed loop to generate fraudulent Input Tax Credits (ITC). The fraudster claims the ITC for a transaction where no goods were actually supplied, thereby evading tax.

(ii) Misclassification of goods: Expensive, high-duty goods are deliberately misclassified as cheaper, low-duty items to pay less in taxes. For example, a high-value metal might be declared as common scrap.

(iii) Undervaluation and overvaluation: To evade taxes, importers can undervalue goods on customs documents. For money laundering purposes, goods may be overvalued to justify the movement of illicit funds.

(iv) Phantom shipments: This technique involves creating fraudulent invoices and shipping documents for goods that do not exist or are never actually shipped. The paperwork is used to facilitate fraud and launder money.

(v) Country of origin fraud (transshipment): To avoid anti-dumping duties or other trade restrictions, goods are illegally routed through an intermediary country to disguise their true origin.

(vi) Unreported sales: Some scrap dealers engage in significant unaccounted sales and use bogus firms to evade taxes. A tax investigation might find sales of millions of dollars without any valid invoices. 

(b) Trade finance fraud

(i) Duplicate financing: A single shipment or set of invoices is used to secure funding from multiple financial institutions. Without a shared registry, multiple banks can be defrauded by the same transaction.

(ii) Forged documents: Fraudsters exploit the trade industry’s reliance on paperwork by creating fake invoices, forged bills of lading, and false certificates of origin to deceive banks and clients.

(iii) Collateral fraud: The same cargo is repeatedly used as collateral to secure multiple loans from different banks. In a prominent example, a warehouse fraud scheme in China used fake warehouse receipts for the same metals cargo to secure nearly $1.8 billion in funds. 

(c) Illegal waste trafficking

(i) False declaration of waste: Illegal waste traders exploit the difference in value between waste and second-hand goods or recyclable materials. They falsify shipping documents to misclassify hazardous waste as legitimate, non-hazardous goods. This allows them to illegally dump waste in countries with less strict regulations.

(ii) Using legitimate businesses to launder money: Legitimate waste management companies are sometimes used by organized crime groups to launder illicit profits. These criminals mix payments from legal and illegal waste trade to conceal the money trail. 

(d) Consequences and detection

(i) Collusion and shell companies: Many of these schemes rely on collusion between complicit parties and the use of shell companies, often registered under the names of unwitting individuals.

(ii) Enforcement challenges: Waste trafficking is often low-priority for law enforcement, and officers may lack the technical expertise to detect illegally misclassified shipments. Fraudsters also disappear before audits can be conducted.

(iii) Combating fraud: Anti-fraud measures are increasing, such as using data analytics and artificial intelligence to spot anomalies in trade patterns. Financial institutions are also enhancing their due diligence and verification processes. 

F. Reason for ITC frauds in scrap dealing

(a) Unorganized Sector: Scrap is generated in various household and other places where seller is not required to pay any GST. This scrap is purchased by small time Kabadi, who are all unregistered under GST. These kabadis sell the scrap to a bigger trader say X.  X, who purchases the scrap from kabadis, his turnover is definitely more than 40 lacs in a year and therefore he is eligible to GST.

(b) High GST on purchases from unregistered dealers: A large portion of scrap metal comes from small, unorganized collectors, or kabadis, who are not registered under GST. When a larger, GST-registered dealer buys scrap from these unregistered collectors, the dealer has to pay the full GST on the eventual sale to a manufacturer but has no input tax credit to offset the liability. The 18% GST rate on scrap creates a strong incentive to illegally acquire credit and avoid paying the tax in cash.

(c) Difficulty tracking the physical supply chain: The scrap industry involves a vast, complex supply chain, from small-scale collectors to large manufacturing plants. This makes it extremely difficult to track the movement of goods, allowing fraudulent traders to claim and pass on fake credits without any actual movement of goods.

(d) Exploitation of the ITC system: Under the GST system, the credit received on one type of good can be used to offset the tax liability on a different good. Fraudsters exploit this by generating fake invoices for unrelated goods, such as medicines or electronics, to create a pool of fraudulent credit. This credit is then used to pay the GST on their scrap sales. 

G. Excise versus GST

(a) Tax on manufacturing unit and not on dealer: The registered dealers under GST have a different status as compared to registered dealers under Central Excise regime.

(i) A Registered Dealer under Central Excise regime was neither claiming any credit nor he was chargeable to duty nor he was assessed to duty.

(ii) In Central Excise, tax was paid only by the manufacturer and not by any dealer. Once the tax was paid by the manufacturer, for the purposes of credit, the tax shown on the invoice and the goods on which tax was paid was inseparable, until credit is again claimed by another manufacturer.

(iii) The credit was claimed again by the manufacturer and not by the registered dealer.

(b) Credit and physical goods were glued to each other: In Excise regime the dealer was a mere forwarder of passing the goods from one manufacturer to other manufacturer while selling of goods. Goods and the tax shown by the originating manufacturer was moving in one box (as if credit and physical goods were glued to each other) and there was no option of un-boxing it by the dealer. He used to mention as to from which manufacturer goods have come and how much tax has been paid by the manufacturer.

(c) No option to swap the credit while selling goods: When, the Central Excise dealer receives identical goods from two different sources, he has no option to swap the credit while selling goods down the line, because for Central Excise dealer the tax paid by the manufacturer cannot be jettisoned from the goods at Central Excise dealer level

(d) Passing of tax credit: If goods valued at ₹ 100/- attracting 16% central excise duty was purchased by dealer where ₹ 16/- has been paid as tax by the manufacturer, now if the dealer sells the same goods for say ₹ 500/-, he is not assessed to 16 % tax on ₹ 500/-. He simply charges a price of ₹ 500/- where central excise credit of ₹ 16/- alone is passed on.

(e) Situation has changed completely under GST regime: As far as a dealer in GST regime is concerned, the situation has changed completely. First of all, he claims credit on his receipt of goods and services. Once the credit is claimed, credit enters in Electronic Credit Ledger maintained under Section 49 and credit is jettisoned from the goods and it can be used in respect of any kind of output supply. When he supplies any goods, he is then assessed to tax which he is required to pay by 20th of the next month. For him, claim of credit on his input supplies under Section 16 and payment of tax on his output supplies under Section 49 are two independent events.

(f) Tax is paid by a dealer either by making a debit in Electronic Credit Ledger or by making a debit in Electronic Cash ledger under Section 49 of the act. GSTR-3B return under Section 39 cannot be filed by him until he discharges his tax liabilities on his output supplies shown in return. Today GSTR-3B is a summary return i.e., it does not capture transaction wise details. However, suppliers are also required to file GSTR-1 under Section 37, which is a transaction wise return capturing registration number of supplier as well as recipient, description and HSN code of the commodity, place of supply, etc. Recipient get their GSTR-2A populated based on the GSTR-1 filed by the supplier. Through GSTN Portal, recipient can also see whether his supplier has filed GSTR-3B or not. Once GSTR-1 is filed and recipient sees that the invoice on which he has taken credit is getting populated under GSTR-2A and for the corresponding month, supplier has also filed GSTR-3B meaning thereby that the supplier has paid the tax as provided under Section 49; the credit on the part of the recipient becomes absolute specially in cases where recipient has paid full consideration along with tax to the supplier.

(g) The manufacturer recipients of goods and services do not know as to how the supplier is going to pay the tax shown on the invoice. Whether supplier will pay the tax by making debit in Cash Ledger or Credit Ledger or combination of the two. The mode of payment of tax by supplier is neither shown on the invoice nor it is possible for recipient to know it. At a date subsequent to supply, tax is to be paid by supplier and recipient can only ascertain whether GSTR-1 is filed or not and GSTR-3B is filed or not by the supplier. Law does not give any power at the hands of the recipient to audit the books of account of the supplier or to know as to how the credit is being taken by the supplier and how he is discharging his tax liability. This is not practicable also.

H. Some perspectives that need to be considered

(a) Scrap from manufacturing units need not to exempted: Scrap is also generated at the end of various manufacturing units such as auto component manufacturers. This scrap also enters into the melting chain. It may be argued that if this scrap is exempted, it will break the credit chain on the part of manufacturing units who generate scrap. They may face other difficulties such as reversal of credit attributable to exempt scrap. To take care of this scenario, GST on scrap for a manufacturer/generator supplier may not be exempted, but for trader’s supplier it should be exempted.  If manufacturer buys the scrap directly from a manufacturing unit, since both the entities have got fixed establishment, one can pay GST and other can claim credit thereof without any difficulty. Whatever purchase is done by manufacturing units from traders, there will be no GST available for credit.

(b) Eliminate source of unorganized sector credit: The primary source of credit in the electronic credit ledger is scrap supplied by traders who are all in unorganized sector. Therefore, a large chunk of government revenue is dependent on good behaviour of unscrupulous scrap traders who are mostly in unorganized sector and that is why it is prone to evasion and ITC fraud. If the source of this credit is eliminated without causing any loss to government revenue, the possibility of evasion of government taxes will automatically get reduced.

(c) Widespread fraud flourishes through fake invoicing while honest businesses receive no incentives and often lose money under the punitive tax structure. Despite wanting to join formal operating frameworks, informal sector workers are blocked by overwhelming compliance requirements and prohibitive tax rates.

(d) Exempt the scrap from tax: If government exempts the scrap supplied by traders from GST, then there will be no loss to government at all, because the scrap is not an item of consumption by an individual, rather an industrial input and thus whatever tax is genuinely paid on scrap is eligible for credit. It should be noted that any tax which is paid, where the recipient claims credit, there is no tax collection by government in real sense. Government collects tax in real sense if and only if GST is paid and no credit is claimed by buyer. Therefore, exempting scrap will actually lead to higher cash tax payment by manufacturing units and thus even if we assume zero ITC fraud today, the overall collection of government will remain unchanged even after exempting scrap supplied by traders.

(e) Minimize the GST rate on scrap:If scrap supplied by traders cannot be exempted and government wants that whoever is dealing with scrap should be part of the government data system and for that reason it cannot be exempted. Then we suggest that the tax rate on melting scrap be reduced to 0.5%. When the tax rate is low, then the probability of fraudulent injection of ITC gets reduced as sharable amount becomes so low that it will be no more lucrative.

(f) Reverse charge mechanism for scrap: If it can be neither exempted, nor tax rate can be reduced to a token level of 0.5%, then Manufacturing units are also ready to discharge GST on their scrap purchase on reverse charge basis. In that scenario they themselves shall be paying 18% tax in cash on scrap purchase and claiming credit thereof.

(g) Ultimate loss to revenue: Under the current regime whatever ITC fraud cases are being booked, traders are primarily not paying any amount and whatever amount is being recovered from manufacturing units, under the law the amount cannot be retained by government. The manufacturing units will automatically get refund after conclusion of litigation.  Therefore, ultimately government is going to lose revenue if it continues with 18% GST rate on melting scrap supplied by traders. Precisely for this reason the current practice of charging 18% GST on melting scrap supplied by traders needs to be abolished.

I. Impact on overall informal recycling sector

(a) The informal recycling sector has always been a concern for environmentalist and health workers. The persons involve in recycling sector on grass root level including rag pickers, junk dealers etc. often fail to adhere to the environmental standards, prone to health hazards and operating outside tax regimes. A heathy policy framed may make them lead to:

(i) Better environmental compliance: no doubt the fair exercise will lead to a transparent methodology leading to recorded trading and better compliances.

(ii) Improved health conditions: the base line workers are prone to health hazards since the scrap constitutes all type of elements which may be injurious to health.

(iii) Improved worker safety: informal recyclers often neglect worker safety. Formalizing the sector ensures adherence to workplace safety regulations.

(iv) A level playing field: registered recyclers who were previously at cost disadvantage due to tax evasion by informal players, can now compete fairly.

(b) Waste recycling and circular economy are seen as pillars of India’s sustainable development policies, with Union Minister for Environment Mr. Bhupender Yadav announcing this March that India’s circular economy could create $2 trillion in market value by 2050. Initiatives like the NITI Aayog’s Circular Economy Cell and Circular Economy Action Plans for different waste categories like plastic, e-waste, industrial waste, hazardous waste and metal waste indicate the government’s efforts towards this end.

(c) India’s GST system is hindering the circular economy by taxing recycled materials at the same rate as virgin ones, discouraging sustainable practices.

(d) This policy failure forces recycling businesses into the informal sector, costing the government significant revenue and exploiting workers.

(e) Reforming GST rates could boost the economy and improve conditions for millions of waste workers.

J. Some exemplary reports highlighting the subject

(a) CSE “Relax the Tax: Facilitating Waste Circularity Ecosystem through GST Rationalization”

A study by the Centre for Science and Environment (CSE). August 12, 2025

The CSE in its analysis used data from market bodies, interaction with industries in the waste recycling sector, tax bodies like Director General of Taxpayer Services and Central Board of Indirect Taxes and Customs, and industry associations like Material Recycling Association of India (MRAI).

(i) CSE study has raised flags over:

• How India’s Goods and Services Tax (GST) structure is hurting the circular economy—a model based on reuse, repair, refurbishing and recycling.
• High tax rates and input credit restrictions are discouraging sustainable practices and inflating compliance costs for small repair businesses and informal recyclers. The 18 per cent tax on e-waste and metal scrap is particularly counterproductive when we are trying to build a robust secondary materials market.
• It reveals that India’s current GST framework is negatively impacting the country’s recycling and waste management efforts. It is inadvertently penalizing the very sectors that could drive India’s transition to a circular economy.
• The current system is financially harmful. The government loses twice what it collects from the waste sector—a loss that gets worse each year.
• It highlights the Indian government is sitting on a hidden revenue of lakhs of crores—from the waste recycling sector, arguing that reducing 18% Goods and Services Tax (GST) on several crucial waste categories could bring in Rs 1.8 lakh crore in additional revenue by 2035.
• Most small dealers who collect scrap cannot afford an 18% GST, so they keep their transactions cash-based and untaxed, these unrecorded transactions lead to estimated Rs 65,000 crore annual GST losses for the government.

(ii) Key GST Issues Identified

• Uniform tax rates: Both recycled items like metal scrap, plastics, and e-waste, and new (virgin) materials are taxed at 18%. This raises the cost of recycled goods, making them less competitive.
• Dominance of the informal sector: High tax rates lead many small recyclers to avoid the formal GST system. Consequently, around 90% of scrap and e-waste transactions occur informally, resulting in a government revenue loss of ₹65,000 crore annually — a figure expected to rise to ₹86,700 crore by 2035.
• Risk to circular economy goals: India’s target to source 40% of steel from scrap by 2030 is threatened because the high GST rates make formal recycling financially unviable.

Issue	Impact on Circular Economy
High GST on repair services	Tax rates up to 18% disincentivize people from getting repairs
GST on refurbished goods	Refurbished items taxed same as new, reducing price advantage
Input Tax Credit (ITC) blockage	ITC not available on certain goods/services, raising costs
Reverse Charge Mechanism (RCM)	Complex RCM rules for scrap dealers cause compliance burden
Registration threshold challenges	Informal recyclers forced to register due to RCM
No tax differentiation for reused goods	GST doesn’t differentiate between new and second-hand

(iii) CSE’s Four Key Recommendations for Reform:

• Gradually lower GST rates on waste materials — reduce from 18% to 12%, and eventually to 5% — to encourage formal participation.
• Formalize the informal sector: Encouraging even part of the informal recyclers to enter the GST system with reduced rates could increase government revenue by ₹62,384 crore by 2035.
• Link GST benefits with recycling targets: Provide GST rebates to companies meeting Extended Producer Responsibility (EPR) obligations through formal recycling channels.
• Collaborate with NGOs and civil society: Train informal workers and help them gain access to social security, government schemes, and formal economic systems.

(iv) Why is this Important?

Lowering GST on recycled materials will make legal, formal recycling more affordable and attractive. This change would boost government tax collections, support environmental objectives, and improve livelihoods for workers in the waste sector. Without these reforms, India risks losing significant revenue and failing to meet its recycling and sustainability goals.

(b) Circular Economy in Municipal Solid and Liquid Waste, A report by The Ministry of Housing and Urban Affairs (MoHUA) in India

It identifies obstacles in current policies, suggests solutions like banning recyclables from landfills, and promotes using recycled materials by reducing GST on them.

The report was prepared by experts from research institutes, IITs, and government entities to promote resource optimization and closed-loop systems for waste management. 

(i) Key Aspects of the MoHUA Report:

• Focus on Recycling: The report emphasizes that large portions of municipal waste can be recycled and diverted from landfills, saving valuable resources and preventing pollution.
• Policy Recommendations: It suggests a complete ban on the dumping of recyclable waste in landfills.
• Taxation on Recycled Materials: The report recommends reducing the Goods and Services Tax (GST) and other taxes on products made from recycled materials to 5% to encourage their use.
• Expert-Driven Analysis: The report was developed by a collaborative effort of experts from various research institutes, Indian Institutes of Technology (IITs), and government agencies.

(ii) Broader Context of Circular Economy in India:

• National Commitment: India, through MoHUA and the Ministry of Environment, Forest and Climate Change (MoEFCC), is committed to circular economy principles for waste management.
• Regulatory Frameworks: Regulations like the Plastic Waste Management Rules, E-Waste Management Rules, and Metal Recycling Policy are in place to support the circular economy.
• Mission ‘LiFE’: The Ministry supports the ‘Life’ (Lifestyle for Environment) initiative, which promotes eco-friendly products and circular economy principles.
• Economic Potential: India’s circular economy has the potential to generate significant market value and decouple economic growth from resource consumption.

K. A bird eye to Legal Consequences for unfair practices

(a) Legal Penalties for GST fraud

Section/Rule	Offence	Penalties under GST Law
Section 29(2)	failure to file returns for a specified period, not starting business within six months of voluntary registration, or obtaining registration through fraudulent means.	cancellation and suspension of GST registration
Rule 21A(2A)	significant discrepancies in returns	temporary suspension of a GST registration
Section 122	Various offences including failure to pay tax, evasion and falsification of records	10% to 100% of tax due depending on the nature of tax due
Section 132	Fake ITC ₹1-2 crore	Punishable by imprisonment of up to one year with a fine
Section 132	Fake ITC ₹2-5 crore	Punishable by imprisonment of up to three years with a fine
Section 132	Fake ITC > ₹5 crore	Punishable by imprisonment of up to five years along with a fine (classified as cognizable and non-bailable)
Rule 86A	fraudulent claims	block Input Tax Credit (ITC) in cases where fraudulent claims are suspected

(b) Prevention of Money Laundering Act (PMLA) and Its Application

(i) Fake Invoicing as a Predicate Offense: In recent judicial interpretations, large-scale GST fraud, including fake invoicing, has been recognized as a predicate offense under PMLA. This means that tax evasion cases linked to fraudulent ITC claims can be prosecuted under anti-money laundering laws.

(ii) Attachment of Properties and Freezing of Bank Accounts: Enforcement authorities can attach properties and freeze bank accounts of individuals or companies involved in fake invoicing scams, ensuring financial recoveries and preventing further fraud.

(iii) Enhanced Penalties: Under PMLA, individuals convicted of money laundering related to GST fraud may face imprisonment of up to seven years, along with heavy fines.

4. CLOSING LINES

Nation stands at a crossroads. Continue with a tax policy that undermines environmental goals, perpetuates worker exploitation, and drains tax money? Or embrace reform that could position the nation as a global leader in sustainable manufacturing while generating massive economic benefits?

The choice should be obvious. The only question is whether policymakers have the vision and will to act.

5. Bibliography with word of Thanks-

Grateful, for the hard work by all the writers who have done marvelous presentation on the subject matter whether brief or broad, this article is no doubt a threading collecting flowers together from gardens of many generous writers who have floated their ideas on digital platform to present the issue remarkably in either way.

• GST Hindrance in India’s Waste Management – A Call for Tax Reforms  https://www.hrdx.in/latest-update/gst-hindrance-in-india-s-waste-management-a-call-for-tax- reforms/91#:~:text=Gradually%20lower%20GST%20rates%20on, schemes%2C%20and%20 formal%20economic%20systems.
• A New Era for India’s Recycling Industry – Goods and Services Tax (GST) Council’s Bold Announcements on Metal Scraphttps://www.pureearth.org/gst-announcement-on-metal-scrap/
• The GST Is Taking Away Ragpickers’ Already-Meagre Incomehttps://thewire.in/economy/gst-ragpickers-plastic-recycling
• Ragpickers hit hard by GSThttps://www.thehindu.com/news/cities/bangalore/ragpickers-hit-hard-by- gst/article19365618.ece
• GST Revenue And Compliance In Recycling Sectorhttps://taxguru.in/goods-and-service-tax/gst-revenue-and-compliance-in-recycling-sector.html
• GST Impact on Circular Economy in Indiahttps://www.efiletax.in/blog/gst-impact-on-circular-economy-in-india/
• Will India’s recycling sector collapse under the GST regime?https://carboncopy.info/will-indias-recycling-sector-collapse-under-the-gst-regime/
• Slashing GST on waste can unlock Rs 1.8 lakh crore, high tax hurting circular economy goals—CSE https://theprint.in/india/slashing-gst-on-waste-can-unlock-rs-1-8-lakh-crore-high-tax-hurting-circular-economy-goals-cse/2720080/
• 18% GST on Plastic Waste Should Gohttps://sustainabilitynext.in/18-gst-on-plastic-waste-should-go/
• Material Recycling Association seeks GST rate cut on metal waste to boost circular economyhttps://www.thehindubusinessline.com/companies/msme/material-recycling-association-seeks-gst-rate-cut-on-metal-waste-to-boost-circular-economy/article68328216.ece
• India’s flawed tax system is killing the circular economyhttps://www.downtoearth.org.in/waste/indias-flawed-tax-system-is-killing-the-circular-economy
• FOIJ urges GST cut on scrap materials to 5% from 18% to curb tax evasion and boost recycling industryhttps://boldnewsonline.com/foij-urges-gst-cut-on-scrap-materials-to-5-from-18-to-curb-tax-evasion-and-boost-recycling-industry/
• Material Recycling Association seeks GST rate cut on metal waste to boost circular economyhttps://www.thehindubusinessline.com/companies/msme/material-recycling-association-seeks-gst-rate-cut-on-metal-waste-to-boost-circular-economy/article68328216.ece#google_vignette
• New CSE study says urgent reforms in GST regime needed to shore up India’s circular economy and waste recycling sector https://www.cseindia.org/new-cse-study-says-urgent-reforms-in-gst-regime-needed-to-shore-up-india-s-circular-economy-and-waste-recycling-sector-12821
• Circular Economy in Municipal Solid and Liquid Water, Ministry of Housing and Urban Affairs (MoHUA)  
• Swadeshi Jagran Manch recommends lower GST for beedi and plastic wastehttps://www.thehindu.com/news/national/swadeshi-jagran-manch-recommends-lower-gst-for-beedi-and-plastic-waste/article70004112.ece
• Final Report-Action Research for Waste Reductionhttps://niti-dbim-dev.inroad.in/node/706
• Fraudulent GST Registration using forged or stolen PAN & Aadhaarhttp://www.gstclub.in/news/2324/Fraudulent-GST-Registration-using-forged-or-stolen-PAN–Aadhaar
• Un-starred question no. 3952, Lok Sabha, “Fraudulent GST registration” Answer Minister of State in Ministry of Finance (Sh. Pankaj Chaudhary)
• GST evasion of Rs 7.08 lakh crore detected in last five fiscal years: Pankaj Chaudhary https://investmentguruindia.com/newsdetail/gst-evasion-of-rs-7-08-lakh-crore-detected-in-last-five-fiscal-years-pankaj-chaudhary195627#:~:text=GST%20evasion%20of%20Rs%207.08%20lakh%20crore,Rs%207.08%20lakh%20crore%20in%2091%2C370%20cases.
• GST Fake Invoicing Scams: Legal Loopholes, Crackdowns, and the Way Forwardhttps://www.taxtmi.com/article/detailed?id=13906
• Case Studies on GST Tax Evasion: Patterns, Impacts, and Regulatory Responses in India, Shobha V https://journal.esrgroups.org/jes/article/view/7245
• GST Fraud: How Businesses Evade Taxes and What Can Be Done https://taxamicus.in/gst-fraud-how-businesses-evade-taxes-what-can-be-done/
• ₹2 Lakh Crore ITC Fraud GST Enforcement Under Scannerhttps://www.efiletax.in/blog/%E2%82%B92-lakh-crore-itc-fraud-gst-enforcement-under-scanner/
• Shell cos to fake invoice: How firms trying to evade GST are getting caughthttps://www.business-standard.com/finance/personal-finance/shell-cos-to-fake-invoices-how-firms-are-trying-to-evade-gst-payments-123061600269_1.html