GST Council may take up proposal for cutting rate on steel scrap to 5%

The GST rate on other kinds of scrap such as plastic, rubber, and wood has already been reduced from 18% to 5%

The Goods and Services Tax (GST) Council may consider reducing the tax rate on steel scrap from the current 18 per cent at its upcoming meeting, which will be held in Lucknow next week. This comes after steel manufacturers faced enforcement action, including the blocking of input tax credit and supply-side disruption, because of fake invoicing by scrap dealers.

Himachal Pradesh Chief Minister Jai Ram Thakur and Punjab Finance Minister Manpreet Singh Badal have also written letters to Union Finance Minister Nirmala Sitharaman flagging this issue.

They have recommended a reduction in GST rate on steel scrap from 18 per cent to 5 per cent. This will help the government earn additional revenue of about Rs 5,000 crore annually, according to industry estimates.

According to the authorities, the modus operandi of those involved in the fake billing racket is to create a series of invoice-issuing supplier entities across different states. The supply is usually made through a complex web to a rolling mill or manufacturer of iron and steel products. Once sizeable supply is made to the manufacturer, the initiator of the chain goes missing.

“By the time the tax administration reaches the chain, the kingpin has already disappeared after having made sizeable transactions within a very short period of time,” Thakur said in his letter to Sitharaman.

He said the government can reduce the incentive for fake billing substantially by reducing the tax rate. Thakur said such a move would make the whole supply chain more tax compliant.  

“It is, therefore, recommended that GST rate on steel scrap may be brought down to 5 per cent from the existing 18 per cent for curbing tax evasion, boosting revenue and providing relief to bona-fide sections of the industry,” the letter said.

The GST rate on other kinds of scrap such as plastic, rubber, and wood has already been reduced from 18 per cent to 5 per cent.

FIXING ISSUES

• Likely agenda items at next GST Council meeting
• Extension of compensation cess for states beyond 2022 
• Correction of inverted duty structure for textiles, footwear, etc.
• Review of concessional rates on Covid-related essential items
• GST rate rationalisation for certain items

In his letter, Badal told Sitharaman that the scale of the fraud was disproportionate in quantum to the scale of industrial activity in the district of Ludhiana and nearby places.

He pointed out that checks like PAN/Aadhaar authentication in granting GST registration weren’t effective in dealing with such frauds.  “As a result, the tax authorities are approaching eventual manufacturers to make good the loss, which is neither fair nor legal unless the manufacturer is colluding in any manner with the wrong-doer,” said Badal.

Many courts have begun recognising this and have granted relief to manufacturers, he added. Badal, too, recommended reducing the GST rate on steel scrap to 5 per cent.

“While another option could be that duty on steel scrap may be made on reverse charge mechanism basis, it may have implications on such suppliers who generate scrap as part of the production process,” Badal said.

Pratik Jain, partner, Price Waterhouse & Co, said as the scrap in this case is used for manufacture of steel products on which GST is paid, reduction in GST rate would not impact revenue collection, but could reduce the incentive to evade tax.

“If it is not possible, levying GST on reverse charge by the manufacturers should be looked at as ensuring compliance in the entire chain is practically impossible,” said Jain.

Separately, the Council should come up with clear guidelines as to which documents would suffice (from the purchasers) for claiming the input credit, he added. Sudhir Goyal, member, All India Induction Furnace Association (AIIFA), said the steel scrap recycling industry is struggling under GST, given the trust deficit between the government and the industry.

“A leap of faith in the form of rate rationalisation on metal scrap or introduction of reverse charge mechanism will go a long way in supporting and simulating the industry.”

In a letter to Sitharaman, AIIFA said while governmental bodies have made efforts to curb tax evasion, the actions taken by these bodies have also led to certain practical challenges for honest and law-abiding manufacturers.