GST-TDS Expansion on Scrap & Recycled Materials (Section 51 CGST Act): Complete Compliance Guide for CAs & CFOs
Statutory Framework & Legal Background
Vide Notification No. 07/2026-Central Tax dated 27th October 2026, the Central Board of Indirect Taxes and Customs (CBIC) has exercised powers conferred under Section 51 of the Central Goods and Services Tax (CGST) Act, 2017 to amend the provisions governing Tax Deduction at Source (GST-TDS). Effective 1st November 2026, specified categories of registered recipients operating in secondary material markets are mandated to deduct 2% tax at source (1% CGST and 1% SGST, or 2% IGST) on payments made or credited to registered suppliers.
The legal foundation rests upon three primary statutory pillars within the indirect taxation architecture:
- Section 51(1) of the CGST Act, 2017: Empowers the Central and State Governments to mandate specific categories of persons to deduct tax at source from the payment made or credited to the supplier of taxable goods or services or both.
- Rule 66 of the CGST Rules, 2017: Prescribes the procedural requirements for filing Form GSTR-7 by the deductor, issuance of TDS certificates in Form GSTR-7A, and claiming credit in the electronic cash ledger of the deductee.
- Section 122(3)(vii) of the CGST Act, 2017: Imposes strict penalties on any person who fails to deduct TDS or deducts less amount required to be deducted, or fails to deposit the deducted amount with the government exchequer, attracting a minimum penalty of 10,000 rupees or an amount equivalent to the tax evaded or not deducted, whichever is higher. Furthermore, delayed remittances attract mandatory interest under Section 50(1) at 18% per annum.
Scope of Expansion & Applicability Matrix
The regulatory amendment broadens the net of GST-TDS beyond traditional metal scrap into high-volume circular economy segments. The applicability matrix categorizes transactions strictly under Business-to-Business (B2B) parameters where both recipient and supplier are registered under GST.
| Category of Material | HSN Code | Nature of Supply | Deduction Rate |
|---|---|---|---|
| Used Cooking Oil | 1518 | B2B Intra/Inter-State Supply | 2% (1% CGST + 1% SGST / 2% IGST) |
| Waste & Scrap of Plastics | 3915 | B2B Intra/Inter-State Supply | 2% (1% CGST + 1% SGST / 2% IGST) |
| Waste & Scrap of Tyres | 4004 | B2B Intra/Inter-State Supply | 2% (1% CGST + 1% SGST / 2% IGST) |
| Electrical & Electronics Waste (E-Waste) | 8549 | B2B Intra/Inter-State Supply | 2% (1% CGST + 1% SGST / 2% IGST) |
| Metal Scrap (Iron, Steel, Copper, Aluminum) | 72 to 81 | B2B Intra/Inter-State Supply | 2% (1% CGST + 1% SGST / 2% IGST) |
Transactions involving unregistered dealers (URD) remain outside the immediate ambit of Section 51 deduction mechanics, though reverse charge mechanisms (RCM) under Section 9(4) must be independently evaluated by internal audit teams.
Step-by-Step Operational & ERP Workflow
To ensure compliance without disrupting supply chain velocity, CFOs and tax heads must overhaul existing Enterprise Resource Planning (ERP) configurations such as SAP, Oracle, or Tally Prime. The operational sequence requires strict adherence to system logic:
- Master Data Validation: Tag vendor master records dealing in HSN codes 1518, 3915, 4004, and 8549 as 'GST-TDS Applicable' to automate identification at the purchase order (PO) stage.
- Automated Calculation at Invoice Booking: Configure accounting software to split invoice line items upon goods receipt note (GRN) posting. The system must compute 2% TDS on the taxable value (excluding GST element) at the time of making payment or booking credit in books, whichever is earlier.
- Ledger Segregation: Maintain distinct liability accounts under current liabilities for 'CGST-TDS Payable', 'SGST-TDS Payable', and 'IGST-TDS Payable' to segregate regular tax liabilities from deducted amounts.
- Deposit & Return Filing: Remit deducted sums via electronic cash ledger by the 10th of the succeeding month and file Form GSTR-7 accurately reflecting the GSTIN of each scrap supplier.
- Certificate Generation: Auto-generate Form GSTR-7A through the GST portal to enable suppliers to claim matching credit in their electronic cash ledgers.
Comparative Analysis: Previous Practice vs. New Mandate
| Parameter | Previous Practice (Pre-Nov 2026) | New Mandate (Post-Nov 2026) |
|---|---|---|
| Covered Commodities | Restricted primarily to public sector undertakings, government agencies, and metal scrap (Chapters 72-81). | Expanded to include used cooking oil, plastic scrap, tyre waste, and e-waste for specified registered recipients. |
| Deduction Trigger | Applicable mainly to notified government bodies, local authorities, and PSU buyers. | Applicable to registered manufacturing and processing businesses procuring specified recycled materials. |
| Compliance Burden | Limited to standard industrial metal recyclers and government contractors. | Mandatory tracking of HSN-level purchase thresholds across all recycling and manufacturing supply chains. |
| Audit Exposure | Lower risk profile for private manufacturing entities regarding Section 51 compliance. | High vulnerability to Section 122 penalties and ITC mismatches during annual GST audits (GSTR-9C). |
Action Plan Checklist for Finance & Audit Teams
Chartered Accountants in practice and corporate tax heads must execute the following 5-point action plan immediately:
- ✔ Audit Vendor Master Data: Review active supplier registries to identify vendors supplying plastic scrap, tyre waste, e-waste, and used cooking oil to verify their active GST registration status.
- ✔ Upgrade ERP Tax Codes: Implement dedicated tax deduction codes in accounting software to ensure automatic withholding of 2% GST-TDS on relevant invoices starting 1st November 2026.
- ✔ Train Procurement Teams: Conduct internal workshops for purchase managers to ensure purchase orders reflect net payable amounts after accounting for Section 51 deductions.
- ✔ Reconcile GSTR-7 with Books: Establish a monthly reconciliation protocol matching TDS deducted in books against GSTR-7 returns filed on the GST portal to prevent supplier credit mismatches.
- ✔ Review Contracts & Pricing: Evaluate existing long-term supply contracts for recycled materials to address cash flow impacts arising from the 2% retention clause.