Balancing the inverted tax structure of the nation could increase the revenue and minimize tax evasion and support the green economy.
The recycling industry in the country which involves plastics, metals, paper, e-waste among others, is at the intersection point between environmental accountability and economic prospect. It can be used to base the green shift in India, lessen the waste in landfills, and minimize the emissions of virgin material production. To recyclers however, the prevailing Goods and Services tax structure (GST) system has become the bane of existence rather than a saviour
The main aspect of the difficulty is the so-called inverted duty structure, in which experts refer to it. GST charged on PET scrap is 18 per cent, and that on recycled PET fibre is 5 per cent hence inverting the tax structure. This imbalance compels the recyclers to pay higher taxation on their inputs than they receive on their outputs trapping working capital in unclaimed Input Tax Credit (ITC). This poses a huge cash-flow pressure to MSMEs. The issue is compounded by the slowness of the working capital release, which slows down the process of releasing working capital and deters the formal involvement in the chain of recycling.
“We are compliant with GST laws, but how can one guarantee the genuineness of the Input Tax Credit (ITC)? We pay the price along with taxes on the scrap being purchased, and months later we receive notices from the GST department stating that the source from whom we procured the scrap was bogus and that the ITC needs to be reversed, along with interest and penalty,” one recycler explained.
The issue goes beyond business math it is shaping the structure of India’s recycling economy. The high 18% tax on scrap discourages small, compliant recyclers from operating within the GST system while incentivising cash-based informal trading where no tax is paid at all. As a result, legitimate operators find themselves undercut by those in the grey market. This has a domino effect: reduced formalisation, revenue losses for the government, and increased environmental costs as more waste ends up in landfills.
According to the Centre for Science and Environment’s (CSE) 2025 report “Relax the Tax,” informality dominates India’s waste sector 95% in paper and glass, 80% in plastics, 90% in e-waste, and 65% in metals. This leakage translates into an estimated ₹65,300 crore loss in potential GST revenue annually, compared to just ₹30,900 crore collected from formal recycling. Without reform, the imbalance could double by 2035.
At the heart of the debate is how GST is collected along the recycling chain. Much of India’s waste originates in unregistered or informal collection networks. Scrap passes through multiple small dealers before it reaches a formal recycler, with GST entering only at the final transaction. This weak link allows fake invoicing and paper-only trades to flourish, leaving compliant recyclers exposed to reversals and penalties if earlier dealers fail to deposit tax.
This inverted duty structure doesn’t just strain cash flow it discourages the very circular economy India is trying to build. When recycled materials face higher or inconsistent taxes than virgin materials, industries naturally shift toward cheaper, non-recycled inputs. This weakens demand for recycled goods and undermines sustainability targets.
Industry voices have long argued that a simple set of GST reforms could turn recycling into a thriving, tax-compliant, job-generating sector.
Among the key recommendations:
- Reduce GST on scrap from 18% to 5%, correcting the inverted duty structure, ensuring fairer pricing for recyclers, and reducing the incentive for tax evasion.
- Introduce Reverse Charge Mechanism (RCM), making recyclers directly responsible for paying GST to the government to eliminate paper-only dealer chains.
- Create separate tax categories for scrap, potentially setting a nominal 1% GST rate for “old scrap” sourced from the informal sector.
- Streamline refund processes to ease the cash-flow crunch for small recyclers and promote timely ITC utilisation.
Industry experts say that fixing these tax distortions could unlock billions in private investment and create over a million new green jobs across the recycling ecosystem. CSE’s projections show that reforms particularly lower scrap rates and faster refund cycles could double formal recycling capacity while saving thousands of tonnes of waste from landfills annually.
The message from industry and experts is clear: the current tax design discourages formal recycling, drains liquidity, and punishes the compliant. A rationalised GST system with lower scrap rates, quicker refunds, and an efficient RCM mechanism can reverse this imbalance driving growth, compliance, and sustainability together.
