NEW DELHI, October 14th :
Uncollected Goods and Services Tax from informal recycling supply chains
totaled ₹65,300 crore in 2024-25, more than double the ₹30,900 crore collected
from formal sector operations, according to a Centre for Science and
Environment report released Monday.
The
gap could widen to ₹1.73 lakh crore by 2035 under current conditions, the
‘Relax the Tax’ study projects, with formal collections reaching only ₹86,700
crore against total estimated tax value of ₹2.60 lakh crore in India’s ₹5 lakh
crore recycling economy.
The
report, available at cseindia.org/relax-the-tax-12819, estimates that
approximately 95 per cent of paper and glass, 80 per cent of plastics, 90 per
cent of e-waste, and 65 per cent of metals flow through informal chains where
GST is not collected. The informal sector includes ragpickers, small dealers,
and medium aggregators who typically operate without GST registration.
“You
pay your taxes, you check the documents, and still a notice arrives years
later,” a Delhi recycler interviewed for the study said, describing the
compliance risks faced by formal sector operators. The recycler, who runs a
paper recycling unit with ten employees, asked how businesses plan expansion
under such conditions.
Some
companies have reported input tax credit reversals that converted ₹1 crore of
tax credits into ₹2.5 crore liabilities after penalties and interest are
applied, according to case studies documented in the CSE analysis. In certain
instances, these disputed notices freeze working capital for months, the report
notes.
Current
GST regulations make recyclers liable for upstream tax fraud even when they
maintain proper documentation including sourcing from GST-registered suppliers,
maintaining e-way bills, and making payments through official banking channels,
the study states. The liability shifts to the last visible entity in the supply
chain-typically the formal recycler.
With
scrap materials currently taxed at 18 per cent GST, the same rate as many
finished goods, that spread makes paper-only trades attractive higher up the
chain and pushes compliance risk toward the last visible, solvent entity-the
recycler, according to the report. Much of India’s plastic and other scrap
originates from unorganized chains: ragpickers to small dealers to medium
aggregators to major dealers, with GST typically entering only at the last leg
when a major dealer invoices a recycler.
The
report examines two policy scenarios that industry associations have referenced
in their representations to government. The first involves Reverse Charge
Mechanism for scrap materials, where the recycler rather than the middleman
pays GST directly to government, eliminating the input tax credit claim
process. Under RCM, liability shifts to the documented buyer-the recycler-who
pays GST directly to the exchequer, starving paper-only dealer chains and
anchoring collection where there is an audit trail.
The
second scenario involves reducing GST rates on scrap from 18 per cent to
approximately 1 per cent. Keeping finished goods at 18 per cent while bringing
down scrap rates removes the arbitrage that drives fraud, the report states.
Shrinking that spread reduces the payoff from fake billing without touching tax
at the value-addition stage.
CSE’s
scenario modeling finds that every reform pathway flips losses into gains,
according to the report. The strongest case-full formalization with a 12 per
cent rate-yields an estimated net positive of ₹1.82 lakh crore by 2035,
compared to the projected net negative of ₹86,700 crore under status quo
conditions.
Industry
associations representing formal recyclers have filed representations with the
GST Council citing working capital constraints and compliance risks documented
in the CSE study.
The
report identifies several operational challenges beyond the headline tax rates,
the study states. These include consumption-to-business flows left outside the
GST framework, misclassification of materials, refund processing friction, and
rate mismatches that strand input tax credits.
Lenders
evaluating project financing for recycling infrastructure cite unpredictable
cash flows as a primary concern when legitimate buyers face legacy liabilities
for upstream non-compliance, the report states. This affects underwriting
decisions for capacity expansion across plastics, paper, metals, and e-waste
processing facilities.
A
clearer line of sight on tax and credits typically lowers underwriting friction
for plastics recycling investments including hot-wash systems, near-infrared
sorting equipment, and de-odor units that lift resin quality, the report notes.
For paper recycling, investments include pulping and fiber-recovery upgrades to
meet recycled-content targets. In metals recycling, delayed projects involve
compact shears and shredders, plus sensor-based sorting to improve yield and alloy
integrity.
When
scrap is trapped in informal chains, cities face overflowing landfills while
ragpickers get squeezed on price, according to the study. When GST flows are
predictable, formal recyclers can invest in better processing, creating safer
jobs and cleaner neighborhoods, the report states.
Industry
estimates cited in the report suggest formalization could create up to one
million jobs within the recycling sector over the next decade, particularly in
sectors including plastic sorting, metal recovery, and paper recycling. The
jobs would span collection, processing, and logistics functions.
The
CSE analysis notes that municipalities could benefit from improved waste
segregation, reduced landfill burden, and more efficient material recovery if
recycling chains formalize. Cities currently face overflowing landfills while
recyclable materials remain trapped in informal channels with limited
processing capacity.
The
report recommends linking GST benefits to verified Extended Producer
Responsibility flows to ensure that tax benefits track real material movement,
not just paper trails. It also suggests establishing Common Facility Centres so
MSME recyclers can upgrade quality and compliance capabilities.
Additional
recommendations include developing city-level transition plans to map informal
chains and create formalization pathways, and providing worker recognition and
social protection for ragpickers and waste collectors who form the foundation
of India’s recycling ecosystem.
Beyond
fiscal impacts, the report states that a strengthened formal recycling sector
contributes directly to India’s climate goals. By keeping plastics, metals, and
paper in circulation, recyclers reduce demand for virgin materials, lower
carbon emissions, and foster a circular economy that can scale nationally,
according to the study.
The
report notes that smarter GST rules can help India recover more materials,
waste less, and bring the green economy into the mainstream. Collecting tax
where accountability is strongest, narrowing the spread that invites fraud, and
building a system where compliance pays are key elements, the study states.
Recycling
represents a capital expenditure story embedded within a tax story, according
to the report. Stabilizing cash flows allows projects to move from pilot to
plant-scale operations. With Reverse Charge Mechanism implementation and lower
scrap rates, plus practical enablers including EPR-GST alignment and Common
Facility Centres, India can attract private capital led by plastics and paper
sectors, with metals contributing, without diluting tax at the point of value
creation, the study concludes.
Industry
associations have emphasized that these reforms align with India’s broader
green economy strategy and circular economy transition goals, according to
representations filed with the GST Council. The associations have cited the CSE
report’s quantified projections in their submissions to policymakers.
The
study was released as part of CSE’s broader research on waste management,
circular economy policies, and environmental taxation frameworks in India.
FOR INQUIRIES:
Adv. Shakeel Siddiqui
Email: advsaiassociates@yahoo.com
CSE Report: https://www.cseindia.org/relax-the-tax-12819
