Recognising the strategic importance of the steel sector, the government issued the National Steel Policy in 2017 laying down a roadmap for encouraging long-term growth of the industry with an estimation that crude steel capacity would reach 300 MT by 2030-31.
In line with the Make in India initiative, domestically manufactured iron and steel products are given preference for government procurement. A production linked incentive scheme (PLI) was also announced for specialty steel segment of this industry.
The steel manufacturing industry can be broadly grouped into two categories — primary manufacturing and secondary manufacturing using induction furnace process. The induction furnace process essentially recycles iron and steel waste to make end-products. The National Steel Policy estimated the share of secondary steel manufacturing vertical to be 35-40 per cent in capacity and production by 2030-31.
The raw material for secondary steel manufacturing mainly comes from scrap dealers, a largely unorganised sector. As of now, most of the steel products, including metal waste, attracts GST at the 18 per cent rate and the liability to pay GST on supplies of such products is on the suppliers. Accordingly, the scrap dealers supplying metal scrap to manufacturers ought to collect and pay 18 per cent GST on such transactions.
Several difficulties
However, given the unorganised and fragmented nature of the scrap industry, procurement of metal waste poses several difficulties for the secondary steel manufacturing industry from a GST perspective. Non-payment of GST by scrap dealers, despite collection from the purchasing manufacturers, continues to be the biggest issue.
This leads to non-eligibility of input tax credit (ITC) in the hands of the manufacturers and thus creates significant tax costs in the supply chain. It is noteworthy that the GST law in India does not permit availment of ITC in hands of purchaser if the supplying dealer has not paid GST on the underlying transaction.
Further, the scrap industry in India has seen several fake invoicing rackets being operated directly hitting the government tax kitty negatively.
The concerns of the industry on difficulties in procurement of their primary raw material (metal scrap) from a GST perspective ought to be addressed.
The industry is believed to have sent a representation to the Ministry of Steel and raised the issue before the Minister concerned. One of the resolutions being proposed is reduction of the GST rate on metal scrap from 18 per cent to 5 per cent to encourage the scrap industry to voluntarily comply with the GST law.
The reduced rate would also be in line with 5 per cent GST rate already extended to various non-metal scraps such as plastic, rubber and wood.
Alternatively, the option of shifting the liability to pay GST on such transactions to purchasing manufacturers, by covering the same under reverse charge mechanism (RCM) can also be considered. Bringing this RCM mechanism for sale of metal scrap will be a win-win situation for the government as well as the industry for it may solve issues of both sides.
With the liability to pay tax being shifted in the hands of the organised steel manufacturing industry, under RCM, the tax leakage would be plugged. The industry, on the other hand, would be assured on eligibility of ITC which would alleviate concerns of tax cost.
The proposals of the Ministry of Steel as regards reduction of GST rate or introduction of RCM may be considered in the next GST Council Meeting.
The Budget’s extension of Basic Customs Duty (BCD) exemption on import of ferrous scrap (including iron and stainless steel scrap) is only for a year. So it would help the industry if the GST Council meeting takes up this issue in its meeting likely in end-February.
Harsh is a Partner, and Ruchita is a Principal Associate, at Economic Laws Practice. Views expressed are personal