Easy Guide to TDS on Metal Scrap under GST

Tax Deducted at Source (TDS) under GST is an important compliance mechanism introduced to bring transparency and accountability into sectors where transactions are frequent, unorganized, and difficult to track. The metal scrap industry is one such sector, dealing with large volumes of goods, multiple layers of suppliers, and informal trading practices. To address tax leakage, under-reporting, and cash-based dealings, TDS was extended to metal scrap transactions. The intent behind applying TDS to this sector is to increase oversight and ensure that scrap dealers, aggregators, and recycling companies follow proper GST compliance. This guide explains the framework in a simple manner so that suppliers and buyers understand their responsibilities clearly.

TDS under GST is a system where the buyer of goods or services deducts a small portion of tax from the amount payable to the supplier and deposits it directly to the government. In the context of metal scrap, this mechanism ensures that every scrap transaction is recorded within the GST system, making it easier for authorities to verify turnover and prevent under-reporting. The amount deducted becomes a credit for the supplier, visible in their GST portal, where it can be used to pay future GST liabilities. This system not only ensures tax collection at the source but also improves compliance in a sector that traditionally operated with limited documentation.

The metal scrap segment is highly vulnerable to tax evasion due to frequent cash purchases, absence of proper invoices, and dealings with unregistered suppliers. Many transactions historically remained outside the GST network, resulting in significant revenue loss. To address this, the government decided to impose TDS on scrap transactions involving notified buyers. This helps create a financial audit trail that compels suppliers to remain tax-compliant. Once TDS is deducted at the time of payment, the buyer effectively confirms to the tax authorities that the transaction has occurred, which reduces the chances of fake invoicing and improves the authenticity of reported turnover.

TDS on metal scrap is not imposed on every buyer. Only specific entities notified by the government are required to deduct TDS whenever they purchase scrap from registered suppliers. These typically include central and state government departments, public sector undertakings, local authorities, and government-controlled agencies. Private companies, in general, are not covered under this provision unless they fall within a notified category. By restricting TDS deductor responsibilities to larger and government-linked entities, the system ensures proper compliance without burdening the entire private sector.

TDS becomes applicable only when certain conditions are met. The supplier must be registered under GST, and the buyer must be a notified TDS deductor. The transaction must involve a taxable supply of metal scrap, and the contract value should exceed the prescribed monetary limit. If these conditions align, the buyer must deduct TDS before making payment. Purchases from unregistered suppliers are not subject to TDS, although they may still raise compliance concerns from a GST standpoint. The triggering of TDS in appropriate cases ensures that only verifiable, tax-paying suppliers remain part of the scrap supply chain.

The TDS rate under GST for metal scrap transactions is fixed at one percent of the taxable value. For intra-state supplies, this rate is split equally between central and state GST components, whereas for inter-state supplies, the entire one percent falls under IGST. Importantly, this deduction is applied only to the taxable value and not to the GST charged in the invoice. By maintaining a uniform and low rate, the government ensures that TDS does not financially burden either party while still serving its purpose of monitoring and controlling scrap transactions.

TDS in a scrap transaction operates through a straightforward process. The supplier first issues an invoice to the TDS deductor. Before making payment, the buyer deducts one percent TDS from the taxable value and deposits this amount with the government. The buyer must then file a monthly GST TDS return and issue a TDS certificate to the supplier. Once deposited, the TDS amount reflects in the supplier’s electronic cash ledger on the GST portal. The supplier can then use this balance to offset GST liability on future sales. This system provides a transparent and verifiable flow of tax from buyer to supplier and finally to the government.

For suppliers, the TDS mechanism provides more advantages than disadvantages. The amount deducted by the buyer immediately appears as a credit in the supplier’s electronic cash ledger, strengthening the supplier’s liquidity position. It also builds credibility, as government and public sector buyers prefer dealing with registered suppliers who maintain transparent records. Over time, TDS compliance improves the reliability of financial statements and reduces disputes with tax authorities. Suppliers who maintain clean, GST-aligned books of accounts benefit from smoother audits and access to larger business opportunities, especially with formal-sector buyers.

The introduction of TDS in the scrap sector has significantly improved tax monitoring and reduced the scope for revenue leakage. The government gains access to real-time information about scrap transactions, including supplier identities, invoice values, and supply volumes. This automated trail helps authorities detect irregularities, prevent the use of fake invoices, and track the movement of scrap across the supply chain. TDS also reduces the burden of enforcement, as tax gets captured at the point of payment, leaving less room for manipulation or concealment of income.

Notified TDS deductors must follow strict compliance responsibilities, including timely deduction, deposit, filing of TDS returns, and issuing of certificates to suppliers. Although this adds administrative work, it protects buyers from potential disputes with tax authorities. Proper TDS compliance also helps maintain transparent procurement records, which is particularly important for public sector undertakings and government agencies that operate under strict audit frameworks. By deducting TDS correctly, buyers also contribute to strengthening formal trade practices in the scrap industry.

Despite its advantages, implementing TDS on scrap transactions presents certain practical challenges. The biggest difficulty is classification, as scrap can vary greatly in form, grade, and origin. Differences in impurity levels, moisture content, and composition often lead to disputes over taxable value. Additionally, large buyers may have to deal with multiple suppliers, requiring strong internal record-keeping and timely reconciliation. Smaller suppliers may also face issues understanding the TDS process, which can delay their ability to claim credit. However, these issues can be minimized with proper documentation, training, and consistent communication between buyers and suppliers.

In the long run, TDS under GST will reshape the scrap industry by promoting documentation, transparency, and accountability. More dealers will register under GST to remain competitive, especially since large buyers prefer working with compliant vendors. The system will discourage cash transactions and support cleaner supply chains. Moreover, by strengthening audit trails, TDS will reduce tax evasion, stabilize pricing, and bring uniformity in scrap-related business practices. Over time, the industry is expected to become more organized, benefiting both buyers and sellers.

TDS on metal scrap under GST is a crucial policy initiative aimed at formalizing one of India’s most fragmented yet economically significant sectors. By shifting a small part of tax responsibility to notified buyers, the government ensures that scrap transactions are properly recorded, compliant, and traceable. Though certain operational challenges exist, the benefits far outweigh the complexities. With better understanding, sound documentation, and proactive compliance, both suppliers and buyers can participate in a transparent, efficient, and well-regulated scrap ecosystem.