NEW GST PROVISIONS APPLICABLE ON METAL SCRAP SUPPLY

(A) TDS by Metal Scrap Recipients

Introduction: Notification No.25/2024-Central Tax Dated: 09th October, 2024 amended Notification No. 50/2018-Central Tax, dated 13th September 2018, issued by the Ministry of Finance, to extend the scope of persons required to deduct TDS (Tax Deducted at Source) under Section 51 of the Central Goods and Services Tax (CGST) Act, 2017. This notification specifically includes registered persons receiving metal scrap supplies under Chapters 72 to 81 of the First Schedule to the Customs Tariff Act, 1975 from other registered persons.

HSN Codes for Metal Scrap:

• While the notification excludes metal scrap, it does not prescribe specific HSN codes for metal scrap directly. However, based on the Customs Tariff Act, the commonly used HSN codes for metal scrap would be:

  • 7204: Iron or steel scrap

  • 7404: Copper scrap

  • 7602: Aluminum scrap

  • 7902: Zinc scrap

  • Other scraps related tobase metals are covered under the respective HSN codes of Chapters 72 to 81.

Key Provisions:

1. TDS Requirement under Section 51: Section 51 of the CGST Act mandates certain persons to deduct TDS when making payments to suppliers of taxable goods or services. The primary goal of TDS is to track and ensure the correct flow of taxes within the GST system.

2. Addition of Metal Scrap Suppliers: This notification specifically brings registered persons receiving metal scrap falling under Chapters 72 to 81 into the purview of TDS deduction. Metal scrap includes various types of base metal waste such as iron, steel, copper, aluminum, zinc, tin, etc. falling under the specified chapters.

3. Who Is Affected: Registered persons who purchase metal scrap from other registered persons must deduct TDS at 2% (1% CGST + 1% SGST or 2% IGST, as applicable) from the payment made to the supplier if the contract value exceeds Rs.2,50,000.

4. Objective of the Notification: The purpose behind extending TDS obligations to metal scrap purchases is to ensure proper tax compliance in this sector. Metal scrap trading has been a focus for revenue authorities due to the high volume of transactions and possible instances of tax evasion. The inclusion of such transactions under TDS provisions is a step toward improving transparency and tax collection in the supply chain.

Comments and Analysis:

1. Compliance Burden on Registered Persons: This notification places an additional compliance burden on registered persons dealing in metal scrap. They must now ensure that TDS is deducted when making payments to suppliers of metal scrap. Failure to deduct TDS can result in penalties and interest under the GST law.
   
   While this step increases compliance, it also adds administrative costs to businesses, especially for those who may not be familiar with TDS provisions under GST.

2. Threshold for TDS Deduction: The threshold of Rs.2,50,000 applies to the total value of Taxable supply under a contract. This means that TDS is applicable only if the total contract value exceeds this threshold, and it is important for businesses to monitor and track their contract amounts carefully to ensure compliance.

3. Impact on Metal Scrap Sector: The metal scrap sector is characterized by large-scale transactions involving both organized and unorganized players. Bringing these transactions into the TDS net helps curb evasion and ensures that suppliers comply with GST provisions. Since scrap trading often involves high-value transactions, the inclusion under TDS provisions enhances the transparency and accountability of players in this sector.

4. Practical Issues: In practice, businesses may face challenges in tracking contracts and ensuring the correct amount of TDS is deducted. Moreover, the cash flow of suppliers may be affected as TDS reduces the immediate liquidity available to them. Suppliers need to ensure they claim TDS credits in their returns to mitigate this impact.

5. TDS and ITC: Suppliers should note that TDS deducted by the recipient will be available as Input tax credit (ITC) in their Electronic cash ledger once it is reflected in their GST portal. This ensures that the cash flow disruption caused by TDS deduction can be compensated when filing GST returns.

Conclusion:

Notification No. 50/2018-Central Tax is a significant step in widening the tax base and improving compliance, particularly in the metal scrap industry, which has historically faced tax evasion concerns. Registered persons purchasing metal scrap under Chapters 72 to 81 are now required to deduct TDS under Section 51 of the CGST Act, increasing the tax collection efficiency in this sector.

While this move promotes transparency, businesses must ensure that they have proper systems in place to track contracts, deduct TDS, and comply with the procedural requirements. Failing to comply with this provision can lead to penalties and interest, making it essential for businesses in this sector to understand the TDS requirements clearly.

VALUE ON WHICH TAX TO BE DEDUCTED:

Under section 51(1) Notwithstanding anything to the contrary contained in this Act, the Government may mandate to deduct tax at the rate of one per cent. (CGST) from the payment made or credited to the supplier (hereafter in this section referred to as "the deductee") of taxable goods or services or both, where the total value of such supply, under a contract, exceeds two lakh and fifty thousand rupees. Since payment is made or credited to the account of the supplier excluding GST, therefore, TDS should be deducted on total value excluding GST.

WHEN TDS TO BE DEDUCTED:

Applicability of TDS: TDS under Section 51 becomes applicable if the total value of taxable supplies made under a single contract exceeds Rs.2,50,000/-. This means that the threshold of Rs.2,50,000/- should be seen in the context of the entire contract for the supply of goods or services.

Contract-Based Calculation: The total value of supplies under a contract is cumulative, meaning the value of all supplies made under the same contract is aggregated to determine whether the threshold of Rs.2,50,000/- has been crossed. For example, if a buyer and a supplier have a contract to supply goods in installments, and the value of the entire contract (across multiple invoices) exceeds Rs.2,50,000/-, TDS will be applicable on those supplies.

Single Contract vs. Multiple Contracts: If you have multiple contracts with the same supplier, TDS will apply only when the value of supplies under each individual contract exceeds Rs.2,50,000/-. For instance, if you have two separate contracts with a supplier, each valued at Rs.2,00,000/-, no TDS will be applicable, as neither contract exceeds the Rs.2,50,000/- threshold.

Invoicing Under a Contract: In practical terms, even if the supplies are made through multiple invoices, as long as they are part of the same contract and the total contract value exceeds Rs.2,50,000/-, TDS will be applicable once the threshold is crossed.

Key Points to Remember:The "under a contract" condition implies that the value of supplies is evaluated in the context of the total value of the contractual agreement. TDS at 2% is applicable when the total value of supplies made under a single contract exceeds Rs.2,50,000/-. This does not apply per invoice but based on the total contract value.

Conclusion: The phrase "under a contract" means that TDS applies when the aggregate value of supplies under a specific contractual agreement exceeds Rs.2,50,000/-. If the supplies are made through multiple invoices but are part of the same contract, TDS will be applicable once the total value crosses this threshold.

Precautions to Prove Supplies Are Made Under Different Contracts:

2. Draft Separate Contracts for Each Transaction:

• Ensure that each contract is drafted separately, outlining distinct terms and conditions for each transaction.

• Each contract should have clear details, such as:

  • Description of goods/services to be supplied.

  • Quantities and delivery schedules.

  • Pricing and payment terms.

  • Start and end dates of the contract.

• The contract should clearly state that it is independent of any other contract with the same party.

2. Maintain Separate Contractual Documentation:

• Keep distinct records for each contract, such as:

  • Correspondence (emails, letters, etc.) related to negotiations.

  • Purchase orders linked to specific contracts.

  • Any amendments or addendums should also be separate and tied to individual contracts.

• Avoid combining multiple transactions or discussions into a single contract or communication.

3. Clear Invoicing:

• Issue separate invoices for supplies made under different contracts. Each invoice should explicitly reference the contract number or purchase order number under which the supply is being made.

• The description of goods or services on the invoice should match the specific contract’s terms, helping to prove that the invoice is related to a different contract.

4. Distinct Purchase Orders:

• If the buyer issues purchase orders, ensure that these are distinct for each contract. Avoid using a single purchase order for multiple transactions.

• Each purchase order should refer to the specific contract it is associated with and contain unique order details.

5. Different Time Frames:

• When possible, separate the timelines of different contracts. For example, contract terms such as delivery dates or the validity period of the agreement should not overlap significantly if you intend to prove they are separate agreements.

• Contracts that span different time frames further demonstrate their independent nature.

6. Distinct Terms and Scope of Work:

• Different contracts should have clearly different scopes of work or supply. For example:

• • If you are supplying different types of goods, ensure the contract specifies these differences.

  • If the same goods are being supplied under different contracts, ensure that the quantities, delivery locations, or terms differ to some extent.

7. Ensure Contractual Independence:

• Each contract should stand independently of the others. Avoid language or terms in one contract that refer to or depend on another contract with the same party.

• Avoid having a "blanket contract" that covers a long-term business relationship, as this could lead to the interpretation that all supplies are under a single contract.

8. Communication with the Other Party:

• Keep clear and distinct communication records with the other party about each contract.

• If there are negotiations, clarifications, or modifications, they should be specifically tied to the relevant contract.

9. Avoid Ambiguities in Contract Language:

• The language in the contracts should clearly establish that these are individual agreements with no connection to any other ongoing or future agreements.

• Remove any language suggesting an ongoing or blanket arrangement unless absolutely necessary.

Additional Considerations:

• Multiple Contracts with the Same Party: If you regularly deal with the same party, it’s crucial that each contract is well-documented and distinct to avoid the interpretation that all supplies are part of a single contractual arrangement.

• Legal Review: Have the contracts reviewed by a legal professional to ensure that they comply with commercial law and cannot be interpreted as part of a larger, singular agreement.

Conclusion:By maintaining clear and distinct contracts, issuing separate invoices, using individual purchase orders, and ensuring that the terms and timelines are different, you can effectively prove that the supplies are made under different contracts rather than a single one. This distinction will be important to prevent the cumulative value from crossing the threshold for TDS under Section 51 of the CGST Act.

(B) RCM by Metal Scrap Recipients:

Introduction: Notification No. 06/2024-Central Tax (Rate), dated 08th October 2024, brings a significant change to the GST compliance framework by introducing the Reverse charge Mechanism (RCM) for registered recipients who purchase metal scrap from unregistered suppliers. This is a crucial update specifically aimed at improving tax compliance in the metal scrap sector.

Key Provisions of the Notification:

1. Reverse charge Mechanism (RCM) on Metal Scrap from Unregistered Suppliers:

• The notification mandates that registered recipients purchasing metal scrap from unregistered suppliers falling under Chapters 72 to 81 of the Customs Tariff Act, 1975 are required to pay tax under the RCM.

• This means that if a registered buyer sources metal scrap from a supplier who is unregistered under GST, the buyer must self-assess and pay GST on the purchase.

2. Registered Recipients Only:

• This provision applies only to registered recipients who are purchasing metal scrap from unregistered suppliers. It is not applicable when the recipient buys from another registered supplier.

• This ensures that even if the supplier is unregistered, the tax revenue is still collected through the recipient under RCM.

3. Applicable Metal Scrap under Chapters 72 to 81:

• The metal scrap falling under Chapters 72 to 81 includes various base metals such as iron, steel, copper, aluminum, zinc, tin, and others. If such scrap is purchased from unregistered suppliers, the recipient is obligated to comply with RCM provisions.

4. Rate of Tax under RCM:

• The recipient is required to pay GST at the standard rate applicable to the type of metal scrap (generally 18%) directly to the government, and they are eligible to claim Input tax credit (ITC) on the same.

Intention Behind the Notification:

1. Plugging Tax Evasion Gaps:

• The metal scrap sector has historically had issues with tax evasion, especially where unregistered suppliers are involved. By shifting the tax liability to the registered recipient through RCM, the government ensures that GST is collected even if the supplier is not registered under GST.

• This reduces the scope for tax leakage in the sector, as the registered buyer now becomes responsible for remitting tax.

2. Encouraging Registration:

• The introduction of RCM on purchases from unregistered suppliers acts as an incentive for suppliers to register under GST. By remaining unregistered, suppliers create an additional compliance burden for their buyers, potentially reducing business opportunities.

• This push towards formalization will likely increase the number of registered entities, thereby improving tax compliance across the sector.

3. Ensuring Compliance and Accountability:

• Registered recipients are generally more compliant with tax regulations and better equipped to handle the procedural requirements of RCM. The government’s intention is to place the compliance burden on entities that have the capacity to comply, ensuring that tax collection is not missed even when dealing with unregistered suppliers.

4. Formalizing the Metal Scrap Sector:

• The metal scrap industry often involves transactions between unregistered suppliers and larger registered buyers. By making registered recipients accountable for paying tax under RCM, the government is pushing towards a more organized and formal sector, improving overall tax transparency.

Impact on the Industry:

1. Registered Recipients:

• Registered recipients purchasing metal scrap from unregistered suppliers will now have to self-assess and pay GST under the RCM. This adds a compliance burden but ensures that the transaction is tax-compliant.

• The recipient can claim ITC on the GST paid under RCM, which can offset the tax liability in their future filings.

2. Unregistered Suppliers:

• For unregistered suppliers, this notification may have an impact on their business operations, as registered buyers might prefer to deal with registered suppliers to avoid the administrative burden of RCM.

• This could incentivize unregistered suppliers to register under GST, increasing the taxpayer base and improving overall tax compliance in the sector.

3. Administrative and Compliance Obligations:

• For registered recipients, this notification means ensuring accurate tax calculation and timely payment under RCM when purchasing from unregistered suppliers. Failure to comply could result in penalties, interest, or even the disallowance of ITC.

Conclusion:

Notification No. 06/2024-Central Tax (Rate) dated 08th October 2024 imposes the responsibility of paying GST under the Reverse charge Mechanism (RCM) on registered recipients purchasing metal scrap from unregistered suppliers. This move is aimed at improving tax compliance in the metal scrap industry, curbing tax evasion, and ensuring that tax collection is not lost even when dealing with unregistered entities.

The provision pushes the metal scrap sector towards more formalization and accountability, while also ensuring that unregistered suppliers have an incentive to register under GST. While this introduces an additional compliance burden for registered buyers, the ability to claim ITC on the GST paid under RCM mitigates the impact.

MANDATORY GST REGISTRATION BY METAL SCRAP SUPPLIERS:

In Notification No. 5/2017-Central Tax, the Central Government provides an exemption from obtaining GST registration to a specific category of persons. This exemption applies to persons who are engaged exclusively in making supplies of taxable goods or services (or both), where the total tax liability is to be paid by the recipient of such supplies under the Reverse charge Mechanism (RCM), as per Section 9(3) of the CGST Act, 2017. But this benefit is withdrawn for metal scrap suppliers vide notification No.24/2024-Central Tax Dated: 09th October, 2024. Now onwards metal scrap suppliers will be required to get registration as soon as they cross the threshold limit.