GST on Scrap Sale: HSN Codes, Reverse Charge and the Documentation Trap

Updated: September 06, 2026 · 16 min read

A factory in Pune received a GST scrutiny notice in early 2025 for ₹18 lakh in alleged tax short-payment — not because it had hidden sales, but because its accounts team had been classifying mild-steel scrap under HSN 7201 (pig iron) instead of HSN 7204 (ferrous waste and scrap). The rate was identical at 18%, but the mismatch between the GSTR-1 HSN summary and the e-way bill triggered an automated flag in the GST portal’s IRIS analytics layer. That is the texture of the problem with GST on scrap sale in India today: the liability is often not about evasion but about documentation gaps that look like evasion to an algorithm.

With the Central Board of Indirect Taxes and Customs (CBIC) expanding AI-driven scrutiny across GSTR-3B versus GSTR-2B mismatches through FY 2025–26, and with e-invoicing now mandatory for virtually every organised industrial seller, getting the paperwork right is no longer optional. This guide cuts through the confusion on HSN codes, reverse charge, e-invoicing, and audit-proof documentation — so your finance team can stop flying blind.

Why GST on Scrap Sale Is a Minefield — and Getting Worse

Scrap is not a single commodity. It is a legally and commercially heterogeneous category — ferrous, non-ferrous, electronic, plastic, paper — each governed by a different HSN heading, and each potentially subject to different GST treatment depending on who is selling to whom. The GST portal’s HSN classification system broadly follows the Harmonised System of Nomenclature, adapted for India under Schedule I and II of the CGST Act, 2017 and the IGST Act, 2017. The applicable rates are notified through separate Central Tax (Rate) notifications issued under those Acts.

The complexity is compounded by the unorganised character of scrap supply chains. A large manufacturer — say, an auto component plant in Pune or a steel re-roller in Bhiwadi — may sell scrap to a registered dealer, an unregistered kabadiwala, or directly to a secondary smelter. Each of those transactions carries different GST obligations: forward charge in one scenario, reverse charge in another, and potentially mandatory e-invoicing layered on top. A single missed step — wrong HSN, absent self-invoice, missing IRN — can unravel Input Tax Credit (ITC) for the buyer and expose the seller to interest under Section 50 of the CGST Act, 2017 at 18% per annum.

CBIC’s decision in the Union Budget 2025–26 to tighten AI-based reconciliation between e-way bill data and GSTR-1 HSN summaries has made misclassification noticeably more detectable. Finance teams that have coasted on loose classification for years are now receiving notices.

The Correct HSN Codes for Every Major Scrap Category

The single most consequential decision your accounts team makes on a scrap invoice is the HSN code. Use the wrong one and you risk not just a notice but disallowance of the buyer’s ITC — which often triggers a commercial dispute with your customer on top of your regulatory exposure.

Ferrous Scrap

All ferrous waste and scrap — mild steel (MS), cast iron, stainless steel, alloy steel — is classifiable under HSN 7204, specifically “Ferrous waste and scrap; remelting scrap ingots of iron or steel.” The four-digit heading covers the category, with six-digit sub-headings distinguishing cast iron (7204 10), stainless steel (7204 21), other alloy steel (7204 29), tinned iron or steel (7204 30), and other ferrous waste and scrap (7204 41, 7204 49). For most factory floor scrap — MS turnings, punching scrap, end cuts — HSN 7204 49 is the correct six-digit classification. This is the code your GST invoice, e-way bill, and GSTR-1 HSN summary must all carry consistently.

Non-Ferrous Scrap

Non-ferrous metals each have their own chapter heading. Copper scrap falls under HSN 7404; aluminium scrap under HSN 7602; lead scrap under HSN 7802; zinc scrap under HSN 7902; nickel scrap under HSN 7503; and tin scrap under HSN 8002. A common error seen in Maharashtra and Gujarat plants is classifying mixed non-ferrous turnings as “HSN 7204” because the stores department treats all metal scrap identically. That is wrong, and it produces an HSN mismatch when the buyer’s smelter files under the correct code.

Plastic and Paper Scrap

Plastic waste and scrap is classified under HSN 3915 (with sub-headings for polymers of ethylene, styrene, vinyl chloride, and others). Paper and paperboard scrap falls under HSN 4707. Both attract 5% GST — a significantly lower rate than metals — which makes misclassifying plastic waste as an industrial input (which could carry a higher or different rate) a notable audit risk. Sellers handling post-consumer plastic scrap should also note their obligations under the Plastic Waste Management Rules, 2016 (as amended in 2024) if they are producers, importers, or brand owners managing that scrap through the CPCB’s EPR portal for plastic waste.

Reverse Charge on Scrap: Exactly When It Applies and Who Pays

Reverse Charge Mechanism (RCM) on scrap is one of the most misunderstood provisions in the GST framework. The operative notification is Notification No. 13/2017–Central Tax (Rate) dated 28 June 2017, issued under Section 9(4) of the CGST Act, 2017. As it currently stands — after the Section 9(4) RCM was suspended and then selectively re-activated — the practical trigger for most industrial scrap transactions is the purchase from an unregistered supplier.

The Unregistered Supplier Rule

If a GST-registered manufacturer or trader purchases scrap from a person who is not registered under GST — a small kabadiwala, an unregistered aggregator, or an individual selling plant clearance scrap — the registered buyer is liable to pay the GST on that purchase under RCM. The buyer must issue a self-invoice under Rule 46 of the CGST Rules, 2017 on the date of receipt of supply, charge the applicable GST (18% for metal scrap, 5% for plastic/paper scrap), and pay it in cash — ITC on the same transaction cannot be used to offset this RCM liability. Critically, the self-invoice number must be reported in GSTR-1 and the tax paid must appear in GSTR-3B’s Table 3.1(d).

When RCM Does Not Apply

If both parties — buyer and seller — are GST-registered, the transaction proceeds on forward charge. The seller issues the tax invoice, charges GST, and the buyer claims ITC on the basis of that invoice reflecting in GSTR-2B. No self-invoice is required. Many factory finance teams confuse themselves by applying RCM logic even to registered-to-registered transactions, which creates ghost liabilities in their GSTR-3B that invite reconciliation scrutiny.

One nuance worth flagging for Tamil Nadu and Karnataka factories that sell scrap to recyclers across state lines: inter-state scrap sales attract IGST (not CGST+SGST) at the same rate, and the e-way bill requirement applies for consignments above ₹50,000 in value. Both the invoice and e-way bill must carry the identical HSN, taxable value, and GSTIN of the consignee.

E-Invoicing After August 2023: The ₹5 Crore Threshold That Caught Factories Off Guard

CBIC reduced the e-invoicing applicability threshold to aggregate annual turnover exceeding ₹5 crore with effect from 1 August 2023, via Notification No. 10/2023–Central Tax dated 10 May 2023. This brought a large cohort of mid-sized manufacturers and industrial units — particularly in the auto ancillary, textile, and chemical sectors — into mandatory Invoice Reference Number (IRN) generation for every B2B invoice, including scrap sale invoices.

Before 1 August 2023, the threshold was ₹10 crore. The halving of the threshold meant that a Thane-based precision engineering firm with ₹7 crore annual turnover, which had been issuing manual scrap sale invoices to a registered recycler, suddenly needed to generate IRNs through the Invoice Registration Portal (IRP) operated by the GST Network (GSTN). Failure to do so means the invoice is not a “tax invoice” in the eyes of the GST law — and the buyer cannot claim ITC on it, even if the tax was actually paid.

The practical consequence: if your scrap buyer — whether a recycler, a secondary smelter, or an intermediary — discovers that your invoices lack valid IRNs, they will either deduct the GST amount from the settlement or refuse the consignment. Several disputes of this nature surfaced in Maharashtra’s MSME sector through 2024. Checking your aggregate turnover against the ₹5 crore threshold, and activating e-invoicing if you cross it, is a non-negotiable first step for any finance team reading this.

Six Reasons a Scrap Sale Triggers a GST Notice

Based on the pattern of scrutiny notices and demand orders visible across GST tribunals and advance ruling authorities, the following are the most common documentation failures that trigger formal action on scrap transactions.

1. HSN mismatch between GSTR-1 and e-way bill: CBIC’s analytics engine compares HSN codes declared in GSTR-1’s HSN summary with those on e-way bills. A divergence flags the transaction for officer review.
2. RCM not discharged on unregistered purchases: Registered buyers who purchase scrap from kababdiwalas or petty aggregators and do not self-invoice expose themselves to demand plus 18% per annum interest under Section 50 of the CGST Act, 2017.
3. Missing or invalid IRN on e-invoicing-eligible transactions: Post August 2023, any B2B scrap invoice from a seller above ₹5 crore turnover without a valid IRN and QR code is legally defective.
4. GSTR-3B vs GSTR-2B mismatch on ITC from scrap purchases: Buyers claiming ITC on scrap invoices that do not appear in GSTR-2B (because the seller filed late or incorrectly) receive automated demand notices.
5. Under-valuation of scrap consignments: GST authorities have increasingly benchmarked declared invoice values against contemporaneous market rates for MS scrap (which ranged ₹32–₹38/kg across Mumbai yards through Q1–Q3 FY 2025–26). A declared value significantly below the market range invites a valuation dispute under Section 15 of the CGST Act, 2017.
6. Absence of e-way bill for intra-state movement: Several states, including Maharashtra and Gujarat, require e-way bills for intra-state movement of goods above ₹1 lakh (state-specific threshold) — including scrap. Missing e-way bills during transit are a separate penalty exposure under Section 129 of the CGST Act, 2017, with fines up to 200% of the tax on the consignment.

The 8-Point Documentation Checklist That Survives a GST Audit

A GST officer conducting a scrutiny assessment under Section 61 of the CGST Act, 2017, or a full audit under Section 65, will typically ask for the following documents for each scrap transaction. Prepare these proactively — do not wait for the notice.

1. Tax invoice with correct HSN (6-digit), taxable value, GST amount, and buyer GSTIN — for every registered-to-registered sale. For RCM transactions, a self-invoice with the same fields.
2. IRN and QR code on the invoice — mandatory if your aggregate turnover exceeds ₹5 crore. Print the IRN and QR code on the physical invoice or attach the JSON file in your records.
3. E-way bill copy — for all consignments above the applicable value threshold (₹50,000 for inter-state; check state-specific rules for intra-state).
4. Weighbridge slip or weight note — corroborates the quantity declared on the invoice. Discrepancies between weighbridge records and invoice quantity are a valuation red flag.
5. Lorry receipt (LR) or transporter’s document — linking the invoice to the physical movement of goods. Required to defend ITC claims and to rebut any “bill without supply” allegation.
6. Payment evidence — RTGS/NEFT transfer records or crossed cheque acknowledgement confirming payment was received through banking channels. Cash payments above ₹2 lakh are disallowed under Section 40A(3) of the Income Tax Act, 1961, and cash scrap sales above ₹2 lakh also attract TDS obligations under Section 206C of that Act.
7. GSTR-2B reconciliation extract — showing that the buyer’s claim of ITC matches what appeared in GSTR-2B for the relevant period. Keep a monthly reconciliation log, not just year-end.
8. Record retention for 72 months — under Rule 56 of the CGST Rules, 2017, all accounts and documents must be preserved for 72 months from the due date of the annual return for the relevant financial year. For FY 2022–23 returns, that retention clock runs to approximately September 2030.

GST Rates and HSN Reference Table for Common Scrap Materials

The table below consolidates the correct HSN codes, applicable GST rates, and key compliance notes for the scrap categories most commonly sold by Indian manufacturers and industrial units. Cross-reference this against your existing invoice templates and GSTR-1 HSN summaries.

Scrap Category	HSN Code	GST Rate	RCM Applicable?	Key Note
Mild Steel / Cast Iron Scrap	7204 49 / 7204 10	18%	Yes, if seller unregistered	Most common misclassification with HSN 7201
Stainless Steel Scrap	7204 21	18%	Yes, if seller unregistered	Nickel content may affect export classification
Copper Scrap	7404	18%	Yes, if seller unregistered	LME-linked pricing; valuation scrutiny common
Aluminium Scrap	7602	18%	Yes, if seller unregistered	UBC (used beverage can) scrap classified here
Lead Scrap	7802	18%	Yes, if seller unregistered	Battery scrap — also governed by Battery Waste Management Rules, 2022
Plastic Scrap / Waste	3915	5%	Yes, if seller unregistered	PWM Rules, 2016 (amended 2024) EPR obligations may apply
Paper / Paperboard Scrap	4707	5%	Yes, if seller unregistered	Old corrugated cartons (OCC) classified here
Rubber Scrap (used tyres)	4004	5%	Yes, if seller unregistered	Tyre-derived fuel (TDF) may attract different classification

For a full list of scrap materials we purchase and the categories we handle, see our comprehensive scrap buying page, which covers ferrous, non-ferrous, electronic, plastic, and industrial waste streams. For metal scrap specifically, our metal scrap recycling service provides HSN-accurate invoicing for every transaction.

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Frequently Asked Questions

What is the correct HSN code for MS scrap sold by a factory?

Mild steel (MS) scrap and other ferrous waste should be classified under HSN 7204 49 — “other ferrous waste and scrap” — within the broader HSN 7204 heading for ferrous waste, scrap, and remelting ingots. The GST rate is 18%. Using HSN 7201 (for pig iron) or HSN 7208 (for flat-rolled steel products) is a classification error that will produce a mismatch between your GSTR-1 HSN summary and the buyer’s purchase records, and may trigger a scrutiny notice from CBIC’s reconciliation analytics.

When does reverse charge apply on scrap purchases, and who discharges it?

Under Notification No. 13/2017–Central Tax (Rate), when a GST-registered buyer purchases scrap from an unregistered supplier, the buyer must discharge GST under Reverse Charge Mechanism (RCM). The buyer issues a self-invoice under Rule 46 of the CGST Rules, 2017, pays the full GST in cash (ITC cannot offset RCM liability), and reports the transaction in GSTR-3B Table 3.1(d). RCM does not apply when both buyer and seller are GST-registered — forward charge applies in that case.

Is e-invoicing mandatory for scrap sales? What is the current threshold?

Yes. CBIC lowered the e-invoicing applicability threshold to aggregate annual turnover exceeding ₹5 crore with effect from 1 August 2023 (Notification No. 10/2023–Central Tax). Any business above this threshold must generate an IRN and QR code through the Invoice Registration Portal (IRP) for every B2B scrap sale invoice. An invoice without a valid IRN is not a “tax invoice” under GST law — the buyer cannot legally claim ITC on it, even if the underlying tax was paid.

How long must scrap sale GST records be retained?

Under Rule 56 of the CGST Rules, 2017, every registered person must maintain accounts and records for 72 months (6 years) from the due date of furnishing the annual return for the relevant financial year. For FY 2022–23, the annual return (GSTR-9) due date was 31 December 2023 — making the retention deadline 31 December 2029. A GST officer can issue a demand notice under Section 73 (non-fraud) up to 3 years, or Section 74 (fraud/suppression) up to 5 years, from the relevant due date, both of which fall within that 72-month window.

Can a scrap seller face penalties for under-valuing scrap on a GST invoice?

Yes. Section 15 of the CGST Act, 2017 requires that the transaction value — the price actually paid or payable — be the basis for GST computation. GST officers are empowered to reject a declared transaction value if it appears artificially low relative to market rates. For MS scrap, where Mumbai-area yard rates have ranged ₹32–₹38/kg through FY 2025–26, a declared value of ₹15/kg on the same grade would attract a valuation dispute. Penalties under Section 122 can reach 100% of the tax evaded, and interest under Section 50 accrues at 18% per annum from the due date of payment.

Work With The National Recycling Corporation

Getting GST right on scrap sales is partly a classification exercise and partly a systems discipline. The HSN codes are fixed; the discipline — generating the right invoice, the right e-way bill, the right self-invoice where RCM applies, and preserving all of it for 72 months — is where most factory finance teams fall short. National Recycling Corporation was built precisely to remove that friction from the seller’s side.

We are a GST-registered scrap buying and recycling company with pan-India operations. Every transaction we enter — whether for ferrous metal, non-ferrous metal, plastic, paper, or e-waste — is documented to audit standard: correct HSN on the tax invoice, IRN and QR code for e-invoicing-eligible transactions, e-way bill coverage for every consignment in movement, and RTGS payment trails. We work with CFOs and accounts teams who need the documentation to hold up, not just the price to look attractive. Our disposal partners for hazardous and electronic waste are authorised under the Hazardous and Other Wastes (Management and Transboundary Movement) Rules, 2016 and the E-Waste (Management) Rules, 2022.

We also provide BRSR-grade recycling certificates and destruction certificates for companies that need to document waste diversion in their sustainability disclosures. Pricing for ferrous and non-ferrous scrap is benchmarked against London Metal Exchange (LME) rates and domestic Mumbai yard indices, ensuring fair-market valuations that will not invite a GST valuation dispute. To schedule a pickup or request a quote, contact us through our website.

• Pan-India scrap pickup — Maharashtra, Gujarat, Delhi-NCR, Karnataka, Tamil Nadu, Telangana and beyond
• GST-compliant tax invoices with correct HSN codes for every scrap category
• E-invoice (IRN + QR code) generation for all eligible transactions
• CPCB-authorised disposal partners for hazardous waste, e-waste, and battery scrap
• Certificate of recycling / destruction for BRSR and ESG audit documentation
• LME-indexed fair-market pricing with full payment through banking channels
• Dedicated accounts point of contact for high-volume industrial sellers

Sources and References

• Goods and Services Tax Portal — HSN Classification and Rate Finder (GSTN / CBIC)
• CPCB — Hazardous and Other Wastes (Management and Transboundary Movement) Rules, 2016
• CPCB — E-Waste (Management) Rules, 2022 and EPR Authorisation Portal
• CPCB — Extended Producer Responsibility Portal for Plastic Waste (Plastic Waste Management Rules, 2016 as amended 2024)
• Ministry of Steel, Government of India — Scrap Policy and Secondary Steel Sector Data
• NITI Aayog — Circular Economy and Resource Efficiency Policy Framework
• London Metal Exchange (LME) — Benchmark Pricing for Copper, Aluminium, Lead and Zinc
• MSTC Ltd — Government of India Scrap Auction and E-Commerce Platform