Purchasing metal scrap from local scrap aggregators, kabadiwalas, and small unorganized collectors has historically posed significant compliance challenges for manufacturing units, recyclers, and foundries. Because these local suppliers operate below the statutory registration threshold of ₹40,00,000 for goods (or ₹20,00,000 in specified states), they do not collect or remit GST. To curb tax leakage and track base metals entering industrial supply chains, the Central Government brought supplies of metal scrap from unregistered vendors under the reverse charge mechanism (RCM).
If your enterprise purchases scrap iron, steel, copper, brass, aluminium, or lead from an unregistered vendor, your business steps directly into the shoes of the supplier for tax payment. Understanding the exact statutory notifications, documentation requirements, return reporting tables, and the boundary between RCM and Section 51 TDS is critical to avoid interest, penalties, and blocked input tax credit.
Statutory framework under Section 9(4) and Notification No. 06/2024-Central Tax (Rate)
The legal foundation for reverse charge on unregistered purchases is established under Section 9(4) of the CGST Act, 2017. Under this provision, the government may notify specified categories of registered persons who must pay tax on reverse charge basis for specified classes of taxable goods or services received from an unregistered supplier.
Pursuant to the recommendations of the 54th GST Council Meeting, the Ministry of Finance issued Notification No. 06/2024-Central Tax (Rate) dated 8 October 2024, effective from 10 October 2024. This notification amended the parent goods reverse charge notification, Notification No. 4/2017-Central Tax (Rate), by inserting Serial Number 8 into its schedule.
| S. No. | Tariff Headings | Description of Goods | Supplier | Recipient |
|---|---|---|---|---|
| 8 | Chapters 72, 73, 74, 75, 76, 77, 78, 79, 80 or 81 | Metal scrap | Any unregistered person | Any registered person |
Corresponding notifications were issued under the Integrated Goods and Services Tax Act, 2017 (Notification No. 06/2024-Integrated Tax (Rate)) and respective State GST Acts. Whether the scrap purchase is intra-state or inter-state, any registered buyer procuring metal scrap from an unregistered supplier must discharge the applicable tax.
HSN chapters covered: The scope extends across Chapters 72 to 81 of the First Schedule to the Customs Tariff Act, 1975. This encompasses iron and steel (Chapters 72 and 73), copper (Chapter 74), nickel (Chapter 75), aluminium (Chapter 76), lead (Chapter 78), zinc (Chapter 79), tin (Chapter 80), and other base metals under Chapter 81 (such as tungsten, molybdenum, titanium, and cadmium). Most industrial base metal scrap attracts GST at the standard rate of 18 percent (9 percent CGST plus 9 percent SGST, or 18 percent IGST).
Unregistered RCM versus registered scrap purchase TDS under Section 51
Taxpayers frequently confuse reverse charge obligations with the parallel TDS provisions implemented at the same time. The distinction rests entirely on the GST registration status of the supplier:
| Compliance Parameter | Unregistered Scrap Supplier | Registered Scrap Supplier |
|---|---|---|
| Statutory Provision | Section 9(4) of CGST Act | Section 51(1)(d) of CGST Act |
| Applicable Notification | Notification No. 06/2024-Central Tax (Rate) | Notification No. 25/2024-Central Tax |
| Supplier Tax Status | Unregistered entity | Registered entity holding an active GSTIN |
| Tax Mechanism | Reverse Charge Mechanism (RCM) | Tax Deduction at Source (TDS) |
| Rate of Tax | 18% GST (9% CGST + 9% SGST or 18% IGST) | 2% TDS (1% CGST + 1% SGST or 2% IGST) |
| Value Threshold | Applicable on every rupee (no minimum threshold) | Applies only if contract value exceeds ₹2,50,000 |
| Registration Needed | Regular buyer GSTIN (no extra registration) | Separate GST REG-07 registration required |
| Return Form Used | Form GSTR-3B Table 3.1(d) | Form GSTR-7 filed by 10th of following month |
When you purchase metal scrap from a registered vendor, the supplier charges regular forward-charge GST on their tax invoice. Your obligation under Notification No. 25/2024-Central Tax is strictly to deduct 2 percent TDS (1 percent CGST and 1 percent SGST for intra-state, or 2 percent IGST for inter-state) if the taxable contract value exceeds ₹2,50,000. In contrast, when the supplier is unregistered, forward charge does not exist. You pay zero tax to the supplier, assume 100 percent tax liability under RCM, and remit 18 percent GST directly to the government.
Supplier registration threshold rule: Under Notification No. 24/2024-Central Tax, the government removed the general threshold exemption for suppliers of metal scrap whose supplies are liable to RCM. As soon as an unregistered metal scrap dealer crosses the statutory turnover threshold of ₹40,00,000 (or ₹20,00,000), that dealer must mandatorily obtain GST registration. Once registered, supplies shift from RCM under Section 9(4) to forward charge plus Section 51 TDS.
Documentation rules: Section 31(3)(f) self-invoicing and Section 31(3)(g) payment vouchers
Because an unregistered dealer cannot issue a valid GST tax invoice, the recipient must generate the statutory audit trail internally. You cannot claim input tax credit without valid tax-paying documents.
Under Section 31(3)(f) of the CGST Act read with Rule 47A of the CGST Rules, a registered person liable to pay tax under Section 9(3) or Section 9(4) must issue a self-invoice in respect of goods or services received from the unregistered supplier within a period of 30 days from the date of receipt of the supply. The self-invoice must comply with the invoice particulars specified under Rule 46, including a consecutive serial number unique for the financial year, the recipient GSTIN, description of the metal scrap, HSN code, quantity, rate, taxable value, and the applicable tax rate.
In addition, under Section 31(3)(g) read with Rule 52 of the CGST Rules, the recipient must issue a payment voucher to the unregistered supplier at the time of making payment. These two documents form the legal foundation for your purchase register and substantiate your tax positions during departmental audit.
For related procedural analysis on reverse charge documentation in service categories, refer to our compliance guides on RCM on legal services by advocate and ITC and RCM on security services for commercial and corporate entities.
Cash ledger payment and ITC eligibility conditions
The financial handling of reverse charge on metal scrap is governed by strict statutory rules regarding ledger utilisation and credit timing:
1. Mandatory cash payment: Under Section 49(4) read with Section 2(82) of the CGST Act, electronic credit ledger balances can only be utilised to discharge output tax. Section 2(82) expressly defines output tax as excluding tax payable on reverse charge basis. Consequently, you cannot offset RCM liability on metal scrap against your accumulated ITC. You must deposit cash into your electronic cash ledger using Form GST PMT-06 and offset the tax liability in Table 6 of Form GSTR-3B.
2. Immediate input tax credit availment: Under Section 2(62)(b), input tax includes tax payable under Section 9(3) and Section 9(4). Under Section 16(1) of the CGST Act, a registered person is entitled to take credit of input tax charged on supplies used or intended to be used in the course or furtherance of business. Because manufacturing units and foundries consume metal scrap as raw material, the credit is 100 percent eligible and is not restricted by Section 17(5).
3. Same-period credit availment: Under Section 16(2)(c), credit is contingent upon actual payment of tax to the government. When you pay your RCM liability in cash while filing Form GSTR-3B for the tax period, the statutory condition is fulfilled. Therefore, you are legally entitled to claim the input tax credit in Table 4(A)(3) of the very same monthly return. The transaction does not create a permanent tax cost; it represents a temporary working capital requirement discharged and recovered within the same return filing.
4. Exemption from 180-day supplier payment rule: The second proviso to Section 16(2) requires recipients to pay the supplier within 180 days from the invoice date or reverse the availed credit. However, the proviso explicitly states: "other than the supplies on which tax is payable on reverse charge basis". You are not required to track the 180-day vendor payment rule for RCM metal scrap transactions.
Step-by-step reporting workflow in Form GSTR-3B
Follow this five-step compliance procedure when finalizing your monthly returns between the 14th and 20th of the month:
- Weighment and inward receipt: Record the physical receipt of scrap at your weighbridge or factory gate. Collect the weighment slip, delivery memo, and identity details (PAN or Aadhaar) of the unregistered seller.
- Raise internal self-invoice: Generate a self-invoice under Section 31(3)(f) in your ERP or billing software within 30 days. Assign a serial number unique for the financial year and apply the appropriate HSN code (e.g. 7204 for ferrous scrap or 7404 for copper scrap).
- Declare liability in Table 3.1(d): On the GST portal, enter the total taxable value and the calculated tax amounts in Table 3.1(d) (Inward supplies liable to reverse charge). Check the official GSTN Form GSTR-3B user manual for table layout and data entry rules.
- Discharge liability in cash: In Table 6 (Payment of tax), offset the Table 3.1(d) liability exclusively against your electronic cash ledger balance. If cash is insufficient, generate a PMT-06 challan via net banking or NEFT.
- Claim input credit in Table 4(A)(3): In the same return, enter the identical tax figures in Table 4(A)(3) (ITC Available: Inward supplies liable to reverse charge). This instantly adds the credit to your electronic credit ledger, making it available to offset outward tax liabilities on finished goods.
Worked rupee example: foundry metal scrap procurement
Consider Apex Castings Private Limited, an iron foundry operating in Coimbatore, Tamil Nadu. During October 2026, the factory purchases 10 metric tonnes of cast iron scrap (HSN 7204) from local unregistered aggregators for melting. The agreed total purchase price across all procurement slips is ₹4,00,000.
| Transaction Component | Statutory Particulars | Rate | Rupee Amount | Settlement Method |
|---|---|---|---|---|
| Taxable Value | 10 MT cast iron scrap (HSN 7204) | Base Rate | ₹4,00,000 | Paid via bank transfer to scrap aggregators |
| CGST Liability | Section 9(4) Reverse Charge | 9% | ₹36,000 | Declared in GSTR-3B Table 3.1(d) |
| SGST Liability | Section 9(4) Reverse Charge | 9% | ₹36,000 | Declared in GSTR-3B Table 3.1(d) |
| Total GST Payable | Inward RCM Cash Liability | 18% | ₹72,000 | Discharged in cash in Table 6 |
| Eligible ITC Claimed | Inward supplies liable to RCM | 18% | ₹72,000 | Claimed in GSTR-3B Table 4(A)(3) |
The operational sequence proceeds as follows:
- Apex Castings pays the net agreed value of ₹4,00,000 directly to the unregistered suppliers. No tax is paid to the suppliers.
- Apex Castings generates self-invoices under Section 31(3)(f) and issues payment vouchers under Section 31(3)(g) totaling ₹4,00,000.
- In its October 2026 Form GSTR-3B filed by 20 November 2026, Apex Castings declares ₹4,00,000 taxable value in Table 3.1(d) with ₹36,000 CGST and ₹36,000 SGST.
- The company deposits ₹72,000 into its electronic cash ledger and offsets the liability in Table 6.
- In the same return, Apex Castings enters ₹36,000 CGST and ₹36,000 SGST in Table 4(A)(3).
- Net financial impact: Apex Castings pays ₹72,000 cash to the government and immediately receives ₹72,000 credit in its electronic credit ledger. The net tax cost to the business is zero, while compliance is fully preserved.
GSTR-2B reconciliation and common audit traps
Handling metal scrap transactions during monthly GSTR-2B reconciliation requires accounting teams to be vigilant about how data appears on the portal:
Unregistered RCM never appears in GSTR-2B: Because unregistered sellers do not file Form GSTR-1, these purchases will never auto-populate in your Form GSTR-2B. Your accounting software must capture unregistered self-invoices directly from internal purchase registers. If an accountant waits for an unregistered scrap invoice to show up in GSTR-2B before paying tax, the liability will remain unpaid, attracting mandatory 18 percent annual interest under Section 50(1) from the due date of filing.
Misreporting under Table 4(A)(5): A frequent mistake is claiming unregistered scrap RCM credit in Table 4(A)(5) ("All other ITC") instead of Table 4(A)(3) ("Inward supplies liable to reverse charge"). Claiming RCM in Table 4(A)(5) artificially inflates your forward inward credit beyond what appears in GSTR-2B, triggering automated Form DRC-01C mismatch intimations under Rule 88D. Always report reverse charge credit strictly in Table 4(A)(3).
Registered scrap supplier misclassification: If you purchase scrap from a registered vendor who files Form GSTR-1, that invoice will flow into your GSTR-2B. If that registered vendor mistakenly marks the supply as reverse charge, verify the transaction immediately. Registered metal scrap supplies are not subject to RCM; they are subject to forward charge and Section 51 TDS. Ensure registered vendors issue forward-charge tax invoices so your GSTR-2B reconciles cleanly.
Sample supplier declaration format for unregistered scrap purchases
Maintain this declaration on file from unregistered scrap suppliers during onboarding or batch weighment:
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Frequently asked questions
Which tariff chapters are covered under reverse charge on metal scrap?
The reverse charge mechanism covers all waste and scrap of metals classified under Chapters 72 to 81 of the First Schedule to the Customs Tariff Act, 1975. This includes iron and steel (Chapter 72 and 73), copper (Chapter 74), nickel (Chapter 75), aluminium (Chapter 76), lead (Chapter 78), zinc (Chapter 79), tin (Chapter 80), and other base metals (Chapter 81).
Can a buyer pay RCM on metal scrap using input tax credit balance?
No. Under Section 49(4) read with Section 2(82) of the CGST Act, balance in the electronic credit ledger can only be utilised to pay output tax. Output tax specifically excludes tax payable on reverse charge. Therefore, the recipient must discharge the RCM liability strictly in cash through the electronic cash ledger.
Can the buyer claim input tax credit for RCM paid on metal scrap in the same month?
Yes. Once the recipient discharges the reverse charge tax liability in cash through Table 3.1(d) and Table 6 of Form GSTR-3B, the recipient can claim the full eligible amount in Table 4(A)(3) of the same monthly GSTR-3B return, subject to the conditions of Section 16(2).
What document must the buyer issue when buying metal scrap from an unregistered supplier?
Under Section 31(3)(f) of the CGST Act read with Rule 47A of the CGST Rules, the registered recipient must issue a self-invoice within 30 days of receiving the supply. In addition, under Section 31(3)(g), the recipient must issue a payment voucher to the unregistered supplier at the time of making payment.
Does Section 51 TDS apply when purchasing metal scrap from an unregistered supplier?
No. The 2 percent TDS mandate under Section 51 read with Notification No. 25/2024-Central Tax applies exclusively to registered persons receiving metal scrap supplies from other registered persons. When the seller is unregistered, RCM under Section 9(4) applies instead of TDS.
Reconcile your inward supplies and RCM records
Match your purchase register against GSTR-2B in seconds. Identify registered supplier invoices and segregate unregistered inward vouchers that require self-invoicing and cash ledger RCM discharge. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 19 October 2026. Sources: CGST Act Section 9, Notification No. 06/2024-Central Tax (Rate), Notification No. 25/2024-Central Tax, CGST Act Section 31, CGST Act Section 16, GSTN Form GSTR-3B User Manual.