GST Impact on Circular Economy in India
A recent CSE study has raised red flags over how India’s Goods and Services Tax (GST) structure is hurting the circular economy—a model based on reuse, repair, refurbishing and recycling. High tax rates and input credit restrictions are discouraging sustainable practices and inflating compliance costs for small repair businesses and informal recyclers.
What Is a Circular Economy?
A circular economy moves away from the traditional “make-use-dispose” model. Instead, it promotes:
- Reuse and repair of goods
- Refurbishing used items for extended life
- Recycling materials to reduce waste
- Minimising dependence on raw materials
India’s environmental policies support this idea. But GST seems to be pulling in the opposite direction.
Key GST Issues Identified by CSE
The Centre for Science and Environment (CSE) released a July 2025 report analysing the challenges GST poses to circular economy players. Here’s what they found:
| Issue | Impact on Circular Economy |
|---|---|
| High GST on repair services | Tax rates up to 18% disincentivise people from getting repairs |
| GST on refurbished goods | Refurbished items taxed same as new, reducing price advantage |
| Input Tax Credit (ITC) blockage | ITC not available on certain goods/services, raising costs |
| Reverse Charge Mechanism (RCM) | Complex RCM rules for scrap dealers cause compliance burden |
| Registration threshold challenges | Informal recyclers forced to register due to RCM |
| No tax differentiation for reused goods | GST doesn’t differentiate between new and second-hand |
Legal & Notification References
- GST Rate Notification No. 11/2017-CT(R) – defines tax rates for repair services
- Rule 42 & 43 of CGST Rules – restrict ITC on certain exempt or mixed supplies
- Circular No. 113/32/2019-GST – clarification on valuation of second-hand goods
Expert View: Real Cost of GST Compliance
Tax experts argue that repair shops and informal recyclers, which are key to India’s circular economy, suffer due to disproportionate GST compliance costs.
For example:
- A mobile repair shop earning ₹20–30K/month must register under GST if scrap sales are under RCM.
- A small refurbished electronics seller loses price advantage because GST rates equal new items.
This pushes businesses to remain informal, defeating the purpose of GST inclusiveness.
Possible Reforms to Align GST with Sustainability
To support India’s climate goals and promote circularity, policy changes can include:
- Lowering GST on repair and reuse services (from 18% to 5%)
- Offering full ITC on refurbished and recycled goods
- Exemptions or simplified schemes for micro recyclers and informal sector
- Differential GST rates for refurbished goods
GST Circular Economy Fix Needs Urgency
The GST Council needs to consider sustainability-driven taxation. Without aligning GST with circular economy goals, India risks pushing thousands of green jobs into the informal sector or out of business entirely.
Conclusion: Fix GST, Empower Circular India
India’s circular economy cannot thrive under a tax structure designed for linear production. A GST overhaul is necessary to incentivise repair, reuse, and recycling.
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FAQs
Q1. Is GST applicable on used goods?
Yes, but second-hand goods dealers can use a margin scheme. However, many refurbished products still face the full GST rate.
Q2. Do scrap dealers need GST registration?
Yes, due to Reverse Charge Mechanism (RCM), the buyer pays tax, but the seller (scrap dealer) must be registered, even if below ₹20 lakh threshold.
Q3. Can repair businesses claim ITC?
Only on eligible inputs. Many small businesses struggle due to blocked credits under Rules 42/43.
Summary
GST impact on circular economy in India is negative, says CSE report. High tax on repair services, no ITC for recyclers, and complex compliance hurt sustainability.