Table of Contents
Introduction: Expanding the TDS Net on Scrap Transactions under GST
In a significant compliance update, the Ministry of Finance, through Notification No. 25/2024-Central Tax dated 09th October 2024, has amended Notification No. 50/2018-Central Tax dated 13th September 2018. This amendment specifically targets the supply of metal scrap, bringing registered recipients of such supplies under the TDS provisions of Section 51 of the Central Goods and Services Tax (CGST) Act, 2017.
The move aims to plug revenue leakages, enhance traceability in scrap trading, and strengthen the GST ecosystem’s tax collection framework. This article examines the legal background, scope of applicability, HSN coverage, rate of deduction, and compliance mandates arising out of this crucial amendment.
Legal Background: Section 51 of the CGST Act, 2017
Section 51(1) of the CGST Act, 2017 requires certain specified persons to deduct tax at source (TDS) at the time of making payment to suppliers of taxable goods or services, where the total value of supply under a contract exceeds ₹2,50,000, excluding GST.
“The Government may mandate the deduction of tax at source at such rate not exceeding 1% from the payment made or credited to the supplier…”
Prior to the latest amendment, TDS liability under GST was applicable primarily to government departments, local authorities, and notified public sector undertakings. With this amendment, the scope now extends to registered recipients of metal scrap supplies from other registered suppliers.
Extended Scope under Notification No. 25/2024-Central Tax
The new notification explicitly includes registered persons who receive metal scrap supplies under Chapters 72 to 81 of the First Schedule to the Customs Tariff Act, 1975. This inclusion is a compliance-focused initiative, particularly aimed at high-volume, high-risk sectors such as scrap trading.
Key Change Introduced:
Registered buyers of metal scrap are now mandated to deduct TDS at the applicable rate when receiving supplies from registered scrap suppliers.
HSN Classification for Metal Scrap
While Notification No. 25/2024 does not prescribe specific HSN codes for metal scrap, it refers to Chapters 72 to 81 of the Customs Tariff Act, which encompass base metals and their articles.
Here are the commonly applicable HSN codes for metal scrap:
HSN Code | Description |
7204 | Ferrous waste and scrap (Iron or steel) |
7404 | Copper waste and scrap |
7602 | Aluminium waste and scrap |
7902 | Zinc waste and scrap |
Other | Tin, Nickel, Lead, etc. under Chapters 72-81 |
Note: The specific HSN must be determined as per the nature of the scrap material traded. Suppliers and recipients must ensure correct classification under the Customs Tariff.
Applicability of TDS on Scrap Supply – Key Provisions
Below are the major legal and practical implications of the amended notification:
1. Persons Required to Deduct TDS
As per amended Notification No. 50/2018, now read with Notification No. 25/2024, any registered person purchasing metal scrap from another registered person is required to deduct TDS under the following conditions:
- Supplier and recipient both must be registered under GST
- The supply must fall under Chapters 72 to 81
- Value of supply (excluding GST) must exceed ₹2,50,000 under a single contract
2. Rate of TDS
TDS must be deducted at the following rates:
- 1% CGST + 1% SGST (intra-state supply)
- 2% IGST (inter-state supply)
Example: If a registered manufacturer purchases ₹5,00,000 worth of copper scrap (HSN 7404) from a registered trader within the same state, TDS of ₹10,000 (₹5,00,000 × 2%) must be deducted and deposited to the government.
3. Effective Date and Compliance
The provisions under Notification No. 25/2024 shall be effective from the date of its issuance, i.e., 09th October 2024. Applicable transactions from this date onward must adhere to the TDS deduction and return filing requirements.
Rationale behind the Notification: Enhancing Tax Compliance in the Scrap Sector
The scrap trading industry has long been under regulatory scrutiny due to its cash-intensive nature and high risk of input tax credit (ITC) misuse or tax evasion. By bringing such transactions under the TDS regime, the GST authorities aim to:
- Establish a traceable audit trail for scrap movement
- Prevent bogus billing and fake invoicing
- Improve tax revenue visibility and reduce tax evasion
- Encourage voluntary compliance among traders and recyclers
This proactive step strengthens enforcement in a segment that has historically witnessed irregularities, while also aligning with the government’s goal of “minimum tax evasion, maximum compliance.”
Comments and Analysis on GST TDS Applicability to Metal Scrap Transactions
1. Additional Compliance Burden on Registered Persons
The introduction of TDS provisions on metal scrap transactions under GST imposes an additional compliance requirement on all registered persons engaged in the trade of metal scrap. These businesses are now mandatorily required to deduct tax at source when making payments to suppliers, provided the transaction meets the prescribed threshold criteria.
This change significantly increases the administrative responsibilities of businesses, especially those operating in sectors like scrap trading, where transaction volumes and supplier interactions are high. Non-compliance with the TDS requirement can lead to:
- Interest liability under Section 50 of the CGST Act for delayed payment of deducted tax.
- Penalty under Section 122 of the CGST Act for failure to deduct or deposit TDS.
- Disallowance or delay in availing Input Tax Credit (ITC) for the suppliers, resulting in cash flow concerns.
Many small or mid-sized businesses that were not previously well-versed with TDS provisions under GST will now need to invest in:
- System upgrades for tracking contract values.
- Training personnel in GST TDS provisions.
- Engaging professionals or consultants for compliance assistance.
Although this measure strengthens tax enforcement, it adds operational complexity and compliance costs for registered persons.
2. Threshold for TDS Deduction – ₹2,50,000
Under Section 51 of the CGST Act, tax is required to be deducted only if the total value of taxable supply under a single contract exceeds ₹2,50,000. This threshold acts as a safeguard to avoid burdening small transactions and businesses.
It is essential to understand that:
- The threshold applies per contract, and not on aggregate turnover or multiple contracts with the same supplier.
- The value for threshold determination excludes GST components. Hence, only the taxable value is to be considered.
For example, if a contract for supply of metal scrap is valued at ₹2,60,000 plus GST (say 18%), the total consideration is ₹3,06,800, but for TDS purposes, only the ₹2,60,000 taxable value is relevant for computing whether the threshold is crossed.
This requires businesses to:
- Maintain accurate contract-wise records.
- Monitor contract values throughout the financial year to ensure correct application of TDS provisions.
- Track and aggregate amendments or additional supplies under a single contract to reassess the threshold if necessary.
Failure to deduct TDS on eligible transactions can lead to scrutiny, penalties, and denial of ITC to the recipient, hence accurate threshold tracking is critical.
3. Sectoral Impact – Focus on the Metal Scrap Industry
The metal scrap industry has traditionally operated through a mix of organized and unorganized players. The sector often sees high-value cash transactions, minimal documentation, and lower levels of tax compliance.
Bringing this sector under the TDS mechanism under GST achieves the following:
- Formalization of the unorganized sector, encouraging businesses to register under GST and maintain proper books of accounts.
- Monitoring high-value transactions, reducing scope for tax evasion.
- Promoting accountability and transparency in the scrap value chain from collection to resale.
TDS acts as a tool for information collection, allowing authorities to trace the movement of goods and verify returns filed by suppliers. Since most metal scrap dealers operate on thin margins, this move ensures that even small discrepancies are traceable, enhancing overall tax compliance.
However, organized players will have to adapt their accounting practices, vendor management systems, and payment mechanisms to align with these TDS requirements.
4. Practical Challenges in Implementation
While the intent behind TDS provisions is to improve tax compliance, businesses face multiple practical challenges, including:
- Identifying TDS liability at the time of payment or credit, especially in cases where contracts are not formalized or segmented over time.
- Monitoring cumulative supplies under a single contract to track whether the ₹2,50,000 threshold has been crossed.
- Adjusting TDS deductions when contract terms change mid-way, or when goods are returned, which affects the contract value.
From the supplier’s perspective:
- Immediate cash flow is impacted as 1% of the invoice value (excluding GST) is held back by the buyer.
- Suppliers must reconcile TDS entries in the GSTR-7A (TDS certificate) and claim credit in their electronic cash ledger.
- Any mismatch or delay in TDS credit reflection in the GST portal (GSTR-2A/2B) can result in working capital blockages and incorrect return filings.
Thus, businesses must ensure real-time data accuracy, proper contract documentation, and periodic reconciliation with the GST portal.
5. TDS and Its Impact on Input Tax Credit (ITC)
Suppliers of metal scrap who have TDS deducted from their invoices should understand the mechanism for claiming this TDS. The deducted amount:
- Is deposited by the deductor with the government via Form GSTR-7.
- Is reflected in the Electronic Cash Ledger of the supplier (deductee).
- Can be utilized for payment of output tax liability, interest, penalties, or any other dues under GST.
It is important to note that TDS under GST does not form part of Input Tax Credit (ITC) under Section 16 of the CGST Act. Instead, it is treated as cash available for payment of tax and other liabilities.
To claim the benefit of deducted TDS, suppliers must:
- Ensure that the deductor has filed GSTR-7 on time.
- Check that the TDS amount is correctly reflected in their Electronic Cash Ledger.
- Maintain TDS certificates (GSTR-7A) and reconcile with books of accounts.
- Utilize the cash balance in the ledger appropriately during monthly return filing (GSTR-3B).
This mechanism ensures that although the payment is deducted at the time of invoice, it does not result in permanent revenue loss for the supplier, provided that all compliances are met.
WHEN TDS IS TO BE DEDUCTED UNDER SECTION 51 OF THE CGST ACT
Applicability of TDS under GST
Tax Deducted at Source (TDS) under Section 51 of the CGST Act, 2017 becomes applicable when the total value of taxable supplies under a contract exceeds ₹2,50,000. This provision mandates the deduction of tax at the time of payment or credit to the supplier, whichever is earlier.
This threshold is contract-specific, meaning that TDS is not evaluated per invoice or per transaction. Instead, it is assessed on the aggregate value of supplies under a single contract, irrespective of how many invoices are issued against that contract.
Understanding Contract-Based Calculation
The calculation of the ₹2,50,000 limit is cumulative under a particular contract. If a supplier and recipient enter into a contractual agreement to supply goods or services in multiple parts or installments, the total value of that agreement is to be considered as a whole.
Illustration:
If a recipient enters into a contract with a supplier for the supply of goods worth ₹3,50,000 across five invoices of ₹70,000 each, then once the total contract value exceeds ₹2,50,000, TDS provisions become applicable. TDS would need to be deducted on each subsequent payment, beginning from the invoice which causes the cumulative total to breach the threshold.
Single Contract vs. Multiple Contracts
It is essential to differentiate between multiple contracts with the same supplier and multiple invoices under one contract:
- If there are two separate contracts, each having a value of ₹2,00,000, then TDS is not applicable, as neither contract individually crosses the ₹2,50,000 threshold.
- However, if a contract’s cumulative value crosses ₹2,50,000—even through multiple invoices—then TDS must be deducted accordingly.
This emphasizes the need to evaluate each contract independently and monitor cumulative supply values over time.
Relevance of Invoicing under a Contract
Even when supplies under a contract are spread across multiple invoices, TDS becomes applicable once the cumulative contract value crosses ₹2,50,000.
The issuance of multiple invoices does not dilute the applicability of TDS if they are raised under the same contract. From a compliance standpoint, the linkage of invoices to a specific contract should be evident and documented.
Key Legal Interpretation and Practical Points
- TDS applicability is contract-based, not invoice-based.
- The ₹2,50,000 threshold is to be calculated excluding GST (as per Section 15 of the CGST Act).
- TDS rate is 2% (1% CGST and 1% SGST, or 2% IGST for interstate supplies).
- Deduction should be made at the time of payment or credit, whichever is earlier.
Precautions to Prove Supplies Are Made Under Different Contracts
In practice, it is often necessary to establish that multiple supplies to the same party are under separate and distinct contracts—especially to avoid clubbing them into a single contract for TDS applicability. To substantiate the independence of contracts and prevent unnecessary deduction of TDS, the following comprehensive measures must be taken:
A. Draft Separate Contracts for Each Transaction
- Prepare a separate contract for each supply transaction.
- Each contract must clearly state:
- The description of goods/services.
- The quantity and specifications.
- Delivery schedule and payment milestones.
- Start and end dates of the agreement.
- An explicit clause confirming that the contract is independent and not related to any prior or future transactions.
This ensures that the contracts are interpreted independently by auditors or tax authorities.
B. Maintain Separate Contractual Documentation
Maintain a complete set of documents for each contract. This includes:
- Email correspondences or letters showing independent negotiation.
- Purchase orders issued for specific contracts.
- Amendments or addendums kept separate for each contract.
- Avoid combining communications, negotiations, or changes across multiple contracts.
This documentation serves as proof in case of scrutiny.
C. Issue Clear and Separate Invoices
- Each invoice must reference the specific contract or purchase order under which it is issued.
- The description of goods/services should align with the respective contract only.
- Avoid issuing a common invoice for supplies under different contractual arrangements.
This helps prevent misinterpretation that multiple supplies are under a single contract.
D. Use Distinct Purchase Orders
- Each contract should be supported by a distinct purchase order.
- Purchase orders should clearly mention:
- The linked contract number.
- Terms specific to that transaction only.
- Avoid using a single purchase order for multiple supply contracts.
E. Ensure Different Time Frames for Contracts
- Where feasible, structure different contracts with non-overlapping timelines.
- Different start and end dates, delivery schedules, or execution periods add credibility to the argument that these are separate engagements.
F. Define Distinct Scope of Work
- Each contract must have a distinct scope, such as:
- Different goods or services.
- Different delivery locations.
- Different payment methods or clauses.
- If identical goods are being supplied under separate contracts, try to differentiate through delivery dates, specifications, or pricing.
G. Maintain Contractual Independence
- Avoid interlinking terms across contracts.
- Do not use language in any contract that refers to another agreement with the same party.
- Avoid long-term or master service agreements that cover multiple orders over time unless each order is contractually separated.
H. Keep Clear and Isolated Communication Channels
- Maintain email threads or communication records separately for each contract.
- When discussing modifications, clarifications, or issues, ensure those are clearly attributed to the specific contract.
I. Avoid Ambiguity in Contractual Language
- Language should explicitly state that the agreement is limited to the current transaction.
- Refrain from using general or open-ended clauses like “this is part of an ongoing relationship” unless necessary.
- Remove any reference that implies a blanket arrangement or long-term supply relationship.
Additional Legal and Practical Considerations
Multiple Contracts with the Same Party
If you frequently engage in transactions with a single party, it becomes even more essential to:
- Draft contracts with distinct terms.
- Maintain clear and independent documentary trails.
- Avoid overlapping or ambiguous clauses.
Get Contracts Legally Reviewed
To minimize risk and ensure robust defence in case of audit or litigation:
- Seek review by a legal or tax professional.
- Confirm that the contracts reflect genuine independence and meet the tests under contract law and GST provisions.
GST Reverse Charge Mechanism (RCM) on Metal Scrap from Unregistered Suppliers: An In-Depth Analysis of Notification No. 06/2024-Central Tax (Rate)
Introduction
The Government of India, through Notification No. 06/2024-Central Tax (Rate) dated 08th October 2024, has introduced a significant change in the compliance framework under Goods and Services Tax (GST). The notification enforces the Reverse Charge Mechanism (RCM) for transactions involving the purchase of metal scrap by registered recipients from unregistered suppliers. This reform is targeted specifically at the metal scrap industry, which has historically witnessed a high volume of transactions with unregistered dealers, leading to tax leakage and non-compliance.
Key Provisions of the Notification
1. RCM Applicable to Purchases from Unregistered Suppliers
Under the newly introduced provision, where a registered person procures metal scrap from a supplier who is not registered under GST, the registered recipient shall be liable to pay GST under RCM. The goods covered are those falling under Chapters 72 to 81 of the Customs Tariff Act, 1975.
This means that:
- The supplier is not liable to charge or deposit GST.
- The buyer (registered recipient) must self-assess, pay the applicable GST to the government, and report the transaction in GSTR-3B under RCM.
2. RCM Applicable Only to Registered Recipients
This provision strictly applies only to registered recipients. If the buyer is not registered under GST, this RCM clause will not be applicable.
Further:
- If the metal scrap is purchased from a registered supplier, the normal forward charge mechanism will apply.
- This ensures that GST is collected either from the supplier or recipient, depending on their registration status.
3. Scope of Metal Scrap Covered – Chapters 72 to 81
The notification covers metal scrap categorized under Chapters 72 to 81, which includes:
- Iron and steel scrap
- Copper scrap
- Aluminum scrap
- Zinc, tin, nickel, and other base metal scraps
If these items are procured from an unregistered supplier, the recipient must discharge tax under RCM.
4. Applicable GST Rate and Input Tax Credit (ITC)
- The standard GST rate, typically 18%, will apply depending on the nature of the scrap.
- The recipient is entitled to claim Input Tax Credit (ITC) on the GST paid under RCM, provided the goods are used in the course or furtherance of business.
- The ITC can be adjusted in the same month’s return or carried forward for future offset.
Purpose and Objective of the Notification
1. Preventing Tax Evasion in the Metal Scrap Sector
One of the primary motivations behind this notification is to curb tax evasion, which has been prevalent in the metal scrap industry, especially when dealing with unregistered entities.
- Many transactions in this sector occur in cash or informal channels, leading to loss of revenue.
- By shifting the tax liability to the registered recipient, the government ensures that GST is still collected at the point of procurement, even if the seller remains outside the tax net.
2. Promoting Voluntary GST Registration Among Suppliers
The imposition of RCM on purchases from unregistered sellers is designed to:
- Discourage the practice of remaining unregistered
- Encourage voluntary registration among metal scrap suppliers
- Reduce the compliance burden for registered buyers, who might prefer to deal only with registered vendors
This shift is expected to increase formalization in the sector, thereby broadening the taxpayer base and improving compliance.
3. Assigning Responsibility to Capable Taxpayers
Registered recipients typically have:
- Proper accounting systems
- Knowledge and resources for compliance
- Existing GST filing obligations
Hence, the government assigns the tax compliance responsibility to those who are better equipped to handle it, ensuring that tax administration remains efficient and tax revenue is safeguarded.
4. Formalization of the Informal Metal Scrap Economy
The metal scrap industry has often operated in a fragmented and informal manner, with many small players outside the GST system.
- By making it mandatory for registered buyers to pay GST under RCM when buying from unregistered parties, the government is pushing the sector toward formalization.
- This move is expected to improve:
- Transaction traceability
- Tax transparency
Regulatory control over the industry
Purpose and Objective of the Notification
1. Preventing Tax Evasion in the Metal Scrap Sector
One of the primary motivations behind this notification is to curb tax evasion, which has been prevalent in the metal scrap industry, especially when dealing with unregistered entities.
- Many transactions in this sector occur in cash or informal channels, leading to loss of revenue.
- By shifting the tax liability to the registered recipient, the government ensures that GST is still collected at the point of procurement, even if the seller remains outside the tax net.
2. Promoting Voluntary GST Registration Among Suppliers
The imposition of RCM on purchases from unregistered sellers is designed to:
- Discourage the practice of remaining unregistered
- Encourage voluntary registration among metal scrap suppliers
- Reduce the compliance burden for registered buyers, who might prefer to deal only with registered vendors
This shift is expected to increase formalization in the sector, thereby broadening the taxpayer base and improving compliance.
3. Assigning Responsibility to Capable Taxpayers
Registered recipients typically have:
- Proper accounting systems
- Knowledge and resources for compliance
- Existing GST filing obligations
Hence, the government assigns the tax compliance responsibility to those who are better equipped to handle it, ensuring that tax administration remains efficient and tax revenue is safeguarded.
4. Formalization of the Informal Metal Scrap Economy
The metal scrap industry has often operated in a fragmented and informal manner, with many small players outside the GST system.
- By making it mandatory for registered buyers to pay GST under RCM when buying from unregistered parties, the government is pushing the sector toward formalization.
- This move is expected to improve:
- Transaction traceability
- Tax transparency
- Regulatory control over the industry
Implications of the Notification on Industry Stakeholders
1. Impact on Registered Recipients (Buyers)
For businesses registered under GST who purchase metal scrap:
- They will now be liable to pay GST under RCM for purchases from unregistered scrap dealers.
- This leads to an additional compliance step of identifying such transactions, calculating applicable tax, and making timely payments.
- However, the burden is mitigated by the availability of ITC on tax paid under RCM, making it a tax-neutral transaction, provided compliance is correctly followed.
2. Impact on Unregistered Suppliers (Sellers)
- Unregistered suppliers may face challenges, as buyers may prefer to deal with registered vendors to avoid RCM-related compliance.
- This could potentially lead to a loss of business opportunities for unregistered players unless they opt for GST registration.
- Thus, this notification indirectly incentivizes GST registration, promoting a more compliant business environment.
3. Increased Compliance and Documentation Requirements
Registered recipients must now:
- Carefully track procurement from unregistered persons.
- Ensure accurate classification of metal scrap under relevant tariff headings.
- Calculate and deposit the correct GST rate.
- Claim ITC appropriately in returns.
Non-compliance may result in:
- Interest and penalties
- Disallowance of ITC
- Scrutiny by the tax department
Therefore, businesses need to upgrade their systems and train their staff to handle these RCM-specific compliance obligations.
Withdrawal of GST Registration Exemption for Metal Scrap Suppliers
Initially, under Notification No. 5/2017-Central Tax, the government provided an exemption from mandatory GST registration to persons exclusively supplying goods or services covered under Reverse Charge Mechanism (RCM) as per Section 9(3) of the CGST Act, 2017.
This meant:
- If the entire outward supply was liable to tax under RCM, the supplier was not required to register, even if their turnover exceeded the threshold limit.
However, this exemption has now been withdrawn for metal scrap suppliers, vide Notification No. 24/2024-Central Tax, dated 09th October 2024.
New Compliance Requirement for Metal Scrap Suppliers
- From now onwards, metal scrap suppliers will be required to obtain GST registration once their aggregate turnover exceeds the threshold limit prescribed under the law (Rs. 40 lakhs for goods in most states).
- This makes it mandatory for all major players in the scrap industry to register under GST, even if they are dealing with registered recipients paying tax under RCM.
- The aim is to eliminate the practice of remaining unregistered and increase overall tax compliance.
Conclusion: A Strategic Move towards Transparency and Compliance in the Metal Scrap Sector
The newly introduced GST provisions on metal scrap—covering both TDS and the Reverse Charge Mechanism (RCM)—mark a pivotal shift towards a more structured and transparent sector. These reforms are designed to close loopholes in tax evasion, particularly by shifting the tax responsibility to the registered recipients, ensuring compliance even when dealing with unregistered suppliers. The government’s emphasis on formalizing the metal scrap industry is evident, with mandatory GST registration now a requirement for suppliers, driving greater accountability across the supply chain.
While these changes increase the compliance burden for registered recipients, the ability to claim Input Tax Credit (ITC) significantly offsets the impact, making the transition smoother for businesses. The push for formalization is not only a step towards enhanced tax collection but also an opportunity for the sector to grow in a more regulated environment, fostering trust and stability. As the industry evolves under these new provisions, businesses must stay vigilant and adapt to ensure they remain compliant and competitive.
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