New Delhi, [India], October 14, 2025: Uncollected Goods and Services Tax from informal recycling supply chains totaled ₹65,300 crore in 2024-25, more than double the ₹30,900 crore collected from formal sector operations, according to a Centre for Science and Environment report released Monday.
The gap could widen to ₹1.73 lakh crore by 2035 under current conditions, the ‘Relax the Tax’ study projects, with formal collections reaching only ₹86,700 crore against total estimated tax value of ₹2.60 lakh crore in India’s ₹5 lakh crore recycling economy.
The report, available at cseindia.org/relax-the-tax-12819, estimates that approximately 95 per cent of paper and glass, 80 per cent of plastics, 90 per cent of e-waste, and 65 per cent of metals flow through informal chains where GST is not collected. The informal sector includes ragpickers, small dealers, and medium aggregators who typically operate without GST registration.
“You pay your taxes, you check the documents, and still a notice arrives years later,” a Delhi recycler interviewed for the study said, describing the compliance risks faced by formal sector operators. The recycler, who runs a paper recycling unit with ten employees, asked how businesses plan expansion under such conditions.
Some companies have reported input tax credit reversals that converted ₹1 crore of tax credits into ₹2.5 crore liabilities after penalties and interest are applied, according to case studies documented in the CSE analysis. In certain instances, these disputed notices freeze working capital for months, the report notes.
Current GST regulations make recyclers liable for upstream tax fraud even when they maintain proper documentation including sourcing from GST-registered suppliers, maintaining e-way bills, and making payments through official banking channels, the study states. The liability shifts to the last visible entity in the supply chain-typically the formal recycler.
With scrap materials currently taxed at 18 per cent GST, the same rate as many finished goods, that spread makes paper-only trades attractive higher up the chain and pushes compliance risk toward the last visible, solvent entity-the recycler, according to the report. Much of India’s plastic and other scrap originates from unorganized chains: ragpickers to small dealers to medium aggregators to major dealers, with GST typically entering only at the last leg when a major dealer invoices a recycler.
The report examines two policy scenarios that industry associations have referenced in their representations to government. The first involves Reverse Charge Mechanism for scrap materials, where the recycler rather than the middleman pays GST directly to government, eliminating the input tax credit claim process. Under RCM, liability shifts to the documented buyer-the recycler-who pays GST directly to the exchequer, starving paper-only dealer chains and anchoring collection where there is an audit trail.
The second scenario involves reducing GST rates on scrap from 18 per cent to approximately 1 per cent. Keeping finished goods at 18 per cent while bringing down scrap rates removes the arbitrage that drives fraud, the report states. Shrinking that spread reduces the payoff from fake billing without touching tax at the value-addition stage.
CSE’s scenario modeling finds that every reform pathway flips losses into gains, according to the report. The strongest case-full formalization with a 12 per cent rate-yields an estimated net positive of ₹1.82 lakh crore by 2035, compared to the projected net negative of ₹86,700 crore under status quo conditions.
Industry associations representing formal recyclers have filed representations with the GST Council citing working capital constraints and compliance risks documented in the CSE study.
The report identifies several operational challenges beyond the headline tax rates, the study states. These include consumption-to-business flows left outside the GST framework, misclassification of materials, refund processing friction, and rate mismatches that strand input tax credits.
Lenders evaluating project financing for recycling infrastructure cite unpredictable cash flows as a primary concern when legitimate buyers face legacy liabilities for upstream non-compliance, the report states. This affects underwriting decisions for capacity expansion across plastics, paper, metals, and e-waste processing facilities.
A clearer line of sight on tax and credits typically lowers underwriting friction for plastics recycling investments including hot-wash systems, near-infrared sorting equipment, and de-odor units that lift resin quality, the report notes. For paper recycling, investments include pulping and fiber-recovery upgrades to meet recycled-content targets. In metals recycling, delayed projects involve compact shears and shredders, plus sensor-based sorting to improve yield and alloy integrity.
When scrap is trapped in informal chains, cities face overflowing landfills while ragpickers get squeezed on price, according to the study. When GST flows are predictable, formal recyclers can invest in better processing, creating safer jobs and cleaner neighborhoods, the report states.
Industry estimates cited in the report suggest formalization could create up to one million jobs within the recycling sector over the next decade, particularly in sectors including plastic sorting, metal recovery, and paper recycling. The jobs would span collection, processing, and logistics functions.
The CSE analysis notes that municipalities could benefit from improved waste segregation, reduced landfill burden, and more efficient material recovery if recycling chains formalize. Cities currently face overflowing landfills while recyclable materials remain trapped in informal channels with limited processing capacity.
The report recommends linking GST benefits to verified Extended Producer Responsibility flows to ensure that tax benefits track real material movement, not just paper trails. It also suggests establishing Common Facility Centres so MSME recyclers can upgrade quality and compliance capabilities.
Additional recommendations include developing city-level transition plans to map informal chains and create formalization pathways, and providing worker recognition and social protection for ragpickers and waste collectors who form the foundation of India’s recycling ecosystem.
Beyond fiscal impacts, the report states that a strengthened formal recycling sector contributes directly to India’s climate goals. By keeping plastics, metals, and paper in circulation, recyclers reduce demand for virgin materials, lower carbon emissions, and foster a circular economy that can scale nationally, according to the study.
The report notes that smarter GST rules can help India recover more materials, waste less, and bring the green economy into the mainstream. Collecting tax where accountability is strongest, narrowing the spread that invites fraud, and building a system where compliance pays are key elements, the study states.
Recycling represents a capital expenditure story embedded within a tax story, according to the report. Stabilizing cash flows allows projects to move from pilot to plant-scale operations. With Reverse Charge Mechanism implementation and lower scrap rates, plus practical enablers including EPR-GST alignment and Common Facility Centres, India can attract private capital led by plastics and paper sectors, with metals contributing, without diluting tax at the point of value creation, the study concludes.
Industry associations have emphasized that these reforms align with India’s broader green economy strategy and circular economy transition goals, according to representations filed with the GST Council. The associations have cited the CSE report’s quantified projections in their submissions to policymakers.
The study was released as part of CSE’s broader research on waste management, circular economy policies, and environmental taxation frameworks in India.
FOR INQUIRIES:
Adv. Shakeel Siddiqui
Email: [email protected]
CSE Report: https://www.cseindia.org/relax-the-tax-12819
