The inverted GST structure in India—where inputs like scrap are taxed at 18% while outputs such as recycled goods are taxed at only 5%—has become a serious roadblock for recyclers. This imbalance cripples working capital, promotes tax evasion, and weakens India’s vision for a circular and green economy. To ensure fairness and sustainability, the government must adopt a balanced GST reform that supports compliant recyclers and strengthens economic growth.
Understanding the Inverted GST Structure in India
The inverted GST structure refers to a situation where the tax rate on input materials is higher than the tax rate on final products. For example, PET scrap is taxed at 18%, while recycled PET fiber attracts only 5%.
This mismatch traps recyclers’ capital in unclaimed Input Tax Credit (ITC), creating severe cash-flow challenges, especially for small and medium enterprises (MSMEs). The delay in refunding ITC further discourages formal operations, forcing many recyclers to scale down or shift to informal trading systems.
Impact of Inverted GST Structure on Recycling and Green Economy
The recycling industry is the backbone of India’s circular economy, managing waste from plastics, metals, paper, and e-waste. However, the inverted GST structure has made recycling less profitable and more complex.
By taxing scrap at 18%, the system inadvertently rewards informal, cash-based traders while penalizing compliant recyclers. As a result, many formal recyclers face unfair competition and liquidity crises. Meanwhile, industries increasingly turn to virgin materials because they are often taxed lower than recycled products, undermining sustainability goals.
According to the Centre for Science and Environment (CSE), informality dominates India’s waste sector—up to 90% in e-waste and plastics—causing an estimated ₹65,000 crore annual loss in potential GST revenue.
Why the Inverted GST Structure Hurts Formal Recyclers
For formal recyclers, the inverted duty structure has become a compliance nightmare. They often receive GST notices demanding Input Tax Credit reversals if suppliers default or provide fake invoices. Despite paying taxes in full, recyclers face penalties and interest due to weaknesses in the GST chain.
This flawed system drives many small players out of the formal economy and encourages under-the-table transactions. Ultimately, it harms transparency, tax collection, and environmental progress—three pillars of India’s development vision.
Proposed Reforms to Fix the Inverted GST Structure
Experts and policymakers have suggested several key GST reforms to correct the imbalance and support the recycling industry:
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Reduce GST on scrap from 18% to 5% – Aligning input and output tax rates will ease cash flow and promote compliance.
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Implement Reverse Charge Mechanism (RCM) – Allow recyclers to pay GST directly, eliminating fake invoicing and middlemen.
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Introduce a nominal 1% GST rate for “old scrap” – Integrate informal traders without overwhelming them with compliance.
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Simplify refund and ITC processes – Speed up refunds to relieve financial strain on MSMEs and formal recyclers.
These steps can unlock billions in investment, create green jobs, and reduce landfill waste, helping India progress toward a more sustainable economy.
Balanced GST Reform: The Way Forward
A balanced GST structure can transform India’s recycling ecosystem. By removing the tax inversion, the government can strengthen formalization, boost compliance, and promote sustainable growth.
Such reforms will not only stabilize revenue collection but also empower recyclers to invest, innovate, and expand operations—building a stronger foundation for India’s green and circular economy.
The inverted GST structure has disrupted India’s recycling industry and weakened the formal economy. To ensure long-term sustainability, the government must focus on rationalizing GST rates, streamlining refunds, and incentivizing formal recyclers. A balanced approach will help India achieve its economic and environmental goals together—turning recycling into a key driver of green growth.
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