Metal Scrap TDS under Section 194Q vs RCM under Section 9(4) GST: Steel Mill Advisory

Steel melting units, rolling mills, and foundry plants across Chhattisgarh's industrial belts — Urla, Siltara, Borai, and Hirapur — source thousands of metric tonnes of heavy melting scrap (HMS), turnings, and dismantled structural metal every month, much of it from a large, fragmented base of small and often unregistered scrap collectors. This sourcing pattern is precisely why the metal scrap trade has been singled out for one of the most layered compliance regimes in indirect and direct tax: GST reverse charge on unregistered purchases, an income-tax TCS obligation on the seller, and a TDS obligation on the buyer, all of which can apply to the same transaction chain depending on the registration status and category of both parties.

1. Overview of Key Tax Levies on Metal Scrap

Practical Note: GST 2.0, effective from 22 September 2025, restructured the GST slabs into a 5%/18%/40% framework and moved a wide range of items between slabs. Ferrous metal scrap under HSN 7204 was not among the items shifted — it continues to attract 18% GST, both under forward charge from a registered dealer and under reverse charge on unregistered purchases. Do not assume scrap moved to a lower slab; verify the applicable rate against the current rate notification for the specific scrap category being purchased (some non-ferrous or mixed-metal scrap categories can carry different classification, so HSN mapping still needs a line-by-line check).

2. How the RCM on Unregistered Scrap Purchases Operates

Notification No. 06/2024-Central Tax (Rate), which brought metal scrap supplied by unregistered persons under reverse charge with effect from 10 October 2024, remains in force and continues to govern this transaction category:

• When a steel furnace or rolling mill buys scrap from local scrap collectors, kabadiwalas, or any other unregistered supplier, the buyer must self-invoice under Section 31(3)(f) of the CGST Act and issue a payment voucher under Section 31(3)(g), since the unregistered seller cannot issue a valid GST tax invoice.
• GST liability under RCM must be discharged in cash through the electronic cash ledger — it cannot be set off against available input tax credit balance, since RCM liability is a fresh cash outflow by design.
• Input Tax Credit on the RCM amount paid can be claimed in the same or a subsequent monthly GSTR-3B, provided the scrap is used in the manufacture of taxable finished goods (billets, ingots, TMT bars, etc.) and the self-invoice/payment voucher documentation is properly maintained.
• Registered-to-registered scrap purchases continue under forward charge — the registered scrap dealer issues a normal tax invoice charging 18% GST, and the buyer avails input tax credit in the ordinary course, with no self-invoicing required.

3. Form 27C Exemption Mechanics for Manufacturing Plants

A registered induction furnace, rolling mill, or casting plant that buys scrap for in-house consumption (not for resale) is entitled to purchase scrap without the 1% TCS under Section 206C(1) by furnishing a statutory declaration in Form 27C:

1. The buyer (mill) completes and signs Part I of Form 27C, declaring that the scrap purchased will be used exclusively for manufacturing, processing, or producing articles — and not for trading or resale.
2. The seller retains the signed declaration and is required to upload the details to the Income Tax Department (via the reporting mechanism prescribed for Section 206C compliance) within the statutory time limit for the relevant month; sellers who fail to do so remain technically liable for the TCS.
3. Once Form 27C is validly furnished and accepted, TCS under Section 206C(1) does not apply to that purchase. This does not exempt the buyer from Section 194Q TDS — where the buyer's turnover exceeds ₹10 crore and cumulative purchases from that seller cross ₹50 lakh in the financial year, TDS at 0.1% still applies on the value exceeding ₹50 lakh.

Practical Warning: Section 206C(1)(1H)/194Q priority rules mean that where both TCS and TDS could technically apply to the same purchase, TDS under Section 194Q takes precedence once the buyer has furnished Form 27C or otherwise establishes that TCS does not apply — but mills should not assume this automatically; the correct sequencing (TCS applicability check first, followed by TDS if TCS is validly exempted) should be documented transaction-by-transaction to avoid double compliance failure being alleged on audit.

4. Practical Compliance Checklist for Steel Mills

1. Segregate scrap purchases by supplier registration status at the point of procurement — registered (forward charge) versus unregistered (RCM self-invoicing) — since this determines the GST workflow.
2. Self-invoice every unregistered scrap purchase and discharge RCM in cash within the same return period; do not net it against available ITC.
3. Furnish Form 27C to each regular scrap supplier at the start of the year (or per transaction, as the supplier requires) to avoid unnecessary 1% TCS deduction at source.
4. Track cumulative purchase value supplier-wise through the year to correctly trigger Section 194Q TDS once the ₹50 lakh threshold is crossed.
5. Reconcile Form 26AS/AIS periodically to confirm TCS is not being wrongly collected once Form 27C has been furnished, and follow up with sellers where mismatches appear.
6. Confirm the current GST rate and HSN classification for each scrap category purchased at the start of each financial year, since rate notifications for specific waste/scrap sub-categories can be revised independently of the general slab structure.

Related Advisory Services & Practice Guides

• GST Advisory & Compliance
• TDS Return Filing