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NEW DELHI : India's recycling sector faces
a critical fiscal crisis: the government currently collects ₹30,900 crore from
formal recycling but loses ₹65,300 crore annually to informality-driven tax
leakages double the revenue collected. By 2035, under status quo, collections
may reach ₹86.7K crore but losses could escalate to ₹1.82 lakh crore, resulting
in a net negative of ₹86.7K crore.
According to the Centre for
Science and Environment's (CSE) 2025 report titled "Relax the
Tax" (https://www.cseindia.org/relax-the-tax-12819), two targeted GST reforms could
flip this loss into a net positive of ₹1.82 lakh crore through full
formalization with a 12% rate transforming India's ₹5 lakh crore
recycling economy.
The Compliance Paradox: Legitimate
Businesses Pay for Others' Fraud
"You pay your taxes, you
check the documents, and still a notice arrives years later," one Delhi
recycler says. "How do you plan expansion with that risk?"
In a workshop on the outskirts of
Jaipur, a young entrepreneur runs a modest paper recycling unit with ten
employees. Every ton of wastepaper he processes reduces landfill load and saves
trees. But when asked why he hasn't scaled further, his answer is blunt:
"The tax rules make my business risky."
This is a story shared by many
micro, small and medium enterprises (MSMEs) in India's recycling sector.
Whether in plastics, metals, paper, or e-waste, entrepreneurs say they follow
GST rules yet are penalized when upstream dealers vanish or fail to deposit
tax. For a small business, one disputed notice can wipe out working capital.
Recyclers follow all the formal
processes: sourcing from GST-registered suppliers, maintaining e-way bills, and
making payments through official channels. Still, when upstream suppliers fail
to remit GST, the last visible recycler becomes liable, facing penalties,
interest, and unexpected tax reversals. Even relatively small infractions can
freeze working capital for months, stalling expansion and discouraging reinvestment
in infrastructure.
"We follow the rules, pay our
dues, and still end up paying for fraud committed by others in the supply
chain," says one recycler in Delhi.
In some cases, companies have
reported ITC reversals that turn ₹1 crore worth of tax credits into a ₹2.5
crore liability after penalties and interest are applied.
Where the 'Tax Pipe' Leaks: The
Informality Crisis
The CSE report confirms this
reality: informality dominates the very chains these entrepreneurs depend on
approximately 95% in paper & glass, 80% in plastics, 90% in e-waste, and
65% in metals. These are precisely the streams where tax leakages occur.
With scrap taxed at 18%, the same
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. The result is volatile working capital, higher risk
premia, and delayed approvals.
Much of India's plastic and other
scrap originates in the unorganized chain: ragpickers → small dealers → medium
aggregators → big dealer. GST typically enters only at the last leg, when a
major dealer invoices a recycler. With scrap taxed at 18%, fake invoicing and
paper-only trades become attractive.
The Two-Reform Solution
Industry and policy experts point
to two levers that, together or separately, could change the investment
equation:
1. Reverse Charge Mechanism (RCM)
for Scrap
Make the recycler, not the
middleman, pay GST directly to government, cutting out fake invoices. Liability
shifts to the documented buyer the recycler who pays GST directly to the
exchequer. This starves "paper-only" dealer chains and anchors
collection where there is audit trail.
2. Lower GST Rate on Scrap
(approximately 1%)
Keeps finished goods at 18% but
removes the arbitrage that drives fraud. Shrinking that spread reduces the
payoff from fake billing without touching tax at value-add. Bringing down the
GST rate on plastics, metals, paper, and e-waste to around 1% would make
recycling financially viable, enabling entrepreneurs to invest in better
technology, scale their operations, and reduce dependence on informal channels.
Some representations also flag
exemption for scrap as an option, though this is considered controversial.
The Fiscal Revolution: CSE's
Scenario Modeling
CSE's scenario modeling finds that
every reform pathway flips losses into gains. The strongest case full
formalization with a 12% rate yields an estimated net positive of ₹1.82 lakh
crore.
The fiscal stakes are material.
CSE estimates that today formal recycling brings in ₹30,900 crore of GST, while
leakages tied to informality are ₹65,300 crore. On a status-quo path to 2035,
collections rise to ₹86,700 crore but losses escalate to ₹1.73 lakh crore net
negative ₹86,700 crore.
What Steadier Cash Unlocks
A clearer line of sight on tax and
credits typically lowers underwriting friction for:
- Plastics: Higher-throughput hot-wash,
NIR sorting and de-odor units that lift resin quality
- Paper: Pulping and fiber-recovery
upgrades to meet recycled-content targets
- Metals: Compact shears/shredders,
sensor-based sorting to improve yield and alloy integrity
Ask lenders why projects for
hot-wash and NIR sorting lines (plastics), fiber-recovery upgrades (paper) or
compact shredders with alloy sorting (metals) often stall, and the answer is
the same cash flows look unpredictable when legitimate buyers can be hit with
legacy liabilities for someone else's non-compliance.
Beyond Revenue: Green Jobs and
Economic Impact
The benefits of GST reform go
beyond individual businesses. A formalized recycling sector could generate tens
of thousands of green jobs across collection, processing, and logistics.
Municipalities would see improved waste segregation, less landfill burden, and
more efficient material recovery. This, in turn, could stimulate local
economies and enhance the viability of sustainable business models.
According to industry estimates,
these reforms could create up to 1 million jobs within the recycling sector
over the next decade, particularly in sectors like plastic sorting, metal
recovery, and paper recycling.
Moreover, a strengthened recycling
sector contributes directly to India's climate goals. By keeping plastics,
metals, and paper in circulation, recyclers reduce the demand for virgin
materials, lower carbon emissions, and foster a circular economy that can scale
nationally.
The CSE Roadmap: Beyond Tax Reform
Beyond the headline rate, CSE
flags operational frictions that keep cash uneven: C2B flows left out of the
net, misclassification, refund friction, and rate mismatches that strand
credits.
The report also recommends:
- Linking GST benefits to
verified EPR flows: Ensuring that tax benefits track real material movement, not
just paper trails
- Establishing Common Facility
Centers (CFCs): So MSME recyclers can upgrade quality and compliance
- City-level transition plans: To map informal chains and
create formalization pathways
- Worker recognition and social
protection: For ragpickers and waste collectors
The Wider Impact
Smarter GST rules don't just ease
compliance for recyclers; they make India's green economy more resilient. With
stable cash flows, recyclers can scale plastic sorting, fiber recovery in paper
mills, and safe e-waste dismantling. Cities benefit from reduced landfill load,
and workers gain recognition and protection as the system formalizes.
When scrap is trapped in informal
chains, cities face overflowing landfills, while ragpickers get squeezed on
price. When GST flows are predictable, formal recyclers can invest in better
processing, creating safer jobs and cleaner neighborhoods.
Industry Call to Action
India's recycling industry,
represented by leading associations, is urging policymakers to consider these
reforms as part of India's broader green economy strategy. The recommendations
from the CSE report provide a clear roadmap for:
- Implementing RCM for scrap
materials to ensure tax collection at the point of accountability
- Reducing GST rates on scrap
to eliminate arbitrage opportunities that fuel fraud
- Establishing infrastructure
support through CFCs for MSME recyclers
- Integrating EPR compliance
with GST incentives
The Bottom Line
Smarter GST rules can help India
recover more, waste less, and bring the green economy into the mainstream.
Prevention is better than punishment. Collect tax where accountability is
strongest, narrow the spread that invites fraud, and build a system where compliance
pays.
Recycling is a capex story hiding
inside a tax story. Stabilize cash, and projects move from pilot to plant. With
RCM and a lower scrap rate, plus practical enablers like EPR-GST alignment and
CFCs, India can crowd in private capital led by plastics and paper, with metals
in the mix without diluting tax at the point of value creation.
The time has come for policymakers
to recognize recycling as a strategic sector for India's green economy.
Implementing reforms such as RCM, lower rates, and targeted exemptions can
unlock billions in economic value, create green jobs, and accelerate the
country's transition to a sustainable, circular economy.
REFERENCE:
Centre for Science and Environment
(CSE) Report: "Relax the Tax" (2025)
Full report available at: https://www.cseindia.org/relax-the-tax-12819