India: FinMin announces Reverse Charge Mechanism on metal scrap at GST Council meet
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The Union Finance Minister, Ms Nirmala Sitharaman, speaking at the 54th GST Council meeting on 9 September 2024, announced the implementation of the Reverse Charge Mechanism (RCM) for metal scrap transactions.
"On metal scrap, reverse charge mechanism on supply of metal scrap from unregistered persons to registered persons, provided that the supplier shall take registration as and when it crosses the threshold limit. In addition, a recipient who is liable to pay under the RCM shall pay tax even if the supplier is under the threshold.", Union Finance Minister.
Why RCM matters in metal scrap ?
The introduction of RCM in the metal scrap sector aims to address the informal nature of transactions in the industry, ensuring that GST is collected even when dealing with small or unregistered suppliers.
Understanding RCM in metal scrap trades:
The Reverse Charge Mechanism (RCM) shifts the responsibility for paying GST from the supplier to the recipient of goods (here metal scrap). This approach is designed to improve tax compliance in sectors like metal scrap, where transactions frequently involve unregistered or informal participants.
According to the Council's provision, if a business selling metal scrap is not registered for GST, it does not need to charge tax. Instead, the GST-registered buyer will handle the tax payment directly to the government.
- When metal scrap is supplied by an unregistered person to a registered person, the registered buyer is liable to pay GST under the RCM. Additionally, the recipient can later claim it as input tax credit (ITC), which helps offset their future GST liabilities.
- Suppliers must register for GST once their annual turnover crosses the threshold limit depending on the location (INR 20-40 lakhs). However, in transactions with an unregistered supplier, the responsibility for GST falls on the registered recipient, even if the supplier has not crossed the threshold.
- Even if the supplier's turnover is below the threshold limit, making them exempt from GST registration, the buyer must still pay the tax under RCM.
- The GST Council has proposed a 2% Tax Deducted at Source (TDS) on metal scrap supplies for registered businesses involved in business-to-business transactions.
Expert explanation:
RCM is generally applicable when the supplier is unregistered and the buyer is registered. If both the supplier and buyer are registered, the normal GST provisions apply, and the supplier charges GST on the invoice, which the buyer can then claim as input tax credit. RCM typically does not apply in this scenario.
For a registered supplier and a registered buyer, the GST implications are as follows:
Supplier: Charges 18% GST on the sale of goods or services.
Buyer: Receives the invoice with the 18% GST and can claim it as input tax credit, provided they are registered and the goods/services are used for taxable purposes.
Early Reactions on RCM
As per some major trader sources, the GST Council's decision on metal scrap provides only partial relief to market participants. The industry had expected a complete implementation of the Reverse Charge Mechanism to fully address their concerns. However, this measure falls short, leaving some issues unresolved. While broader RCM coverage was recommended, the current move is a limited step forward.
Market experts suggest that the new regulations may initially impact metal scrap recyclers and steel mills reliant on metal scrap. Conversely, smaller scrap sellers could benefit from reduced GST registration and compliance requirements.
A North India-based ferrous scrap consumer commented, "If you need to buy scrap from households, there are no major regulations; buyers simply need to engage registered scrap suppliers. To support this, the government has introduced a law aimed at helping start-ups. Previously, there were no provisions for this, but now home pick-up services can grow without third-party involvement."
He further added, "While TDS compliance adds pressure to industries, it brings clarity from the government's perspective. B2B businesses, which are already established, will continue operations smoothly under the new law. The changes will alleviate the pressure on them, allowing for regular scrap flow."
"The 2% TDS on B2B transactions discourages longer supply chains. This will enhance visibility, ensuring shorter supply chains and timely deliveries. This RCM introduction represents a significant step forward, especially given the nearly decade-long span since GST was first implemented on ferrous scrap."
