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| India scrap |
India's secondary steel manufacturers are facing significant challenges due to tax issues, particularly when local scrap suppliers fail to meet their tax obligations. These issues, highlighted at the All India Induction Furnaces Association (AIIFA) event in Mumbai on 20 September 2023, have created an environment where scrap availability and usage are hindered, affecting production in the country’s secondary steel sector.
Taxation Issues Affecting Scrap Availability
Secondary steel producers in India have voiced concerns over the unfair tax burden imposed on them when domestic scrap suppliers default on payments. According to industry experts, the government targets the scrap buyer for Goods and Services Tax (GST) recovery when the supplier has failed to pay, leading to cases of double taxation. This situation has raised alarms among secondary steelmakers, who rely heavily on scrap as a key feedstock for their operations.
The introduction of the reverse charge mechanism in October 2024 has added to the complications. Under this mechanism, scrap buyers are responsible for paying GST if the seller is not registered. This system has led to instances of fake invoices and supplier registrations, particularly because the scrap sector is largely unorganised. The lack of proper documentation and accountability is discouraging many steelmakers from using scrap in favor of alternative raw materials like Direct Reduced Iron (DRI) or sponge iron.
Impact on India's Green Steel Transition
The unorganised nature of the scrap sector in India is becoming a significant obstacle to the country's transition to green steel production. Scrap, a more environmentally friendly raw material compared to DRI, is essential for this transition. However, due to tax-related challenges, the use of scrap in secondary steelmaking has decreased. Over the past two to three years, the share of DRI in India's secondary steel production has surged from 15-20% to around 40-45%. This shift highlights the growing reliance on more carbon-intensive materials as a substitute for scrap.
Industry participants at the AIIFA event called for a reduction in the GST rate on scrap from the current 18% to 5%. This change would make scrap suppliers more likely to comply with tax regulations, increasing the domestic supply of scrap. Furthermore, there were calls for the scrap sector to be brought under more stringent regulation or formalised to reduce tax evasion and improve material flow.
Rising Power Costs and Their Impact on Steel Production
Alongside tax issues, rising power tariffs have added another layer of complexity for secondary steelmakers, particularly in Maharashtra. Electricity rates in the state are currently higher than those in other steel-producing regions of India, leading to cost disparities. However, the Maharashtra government has promised to reduce electricity costs for both residential and industrial users over the next five years, which could bring some relief to steelmakers in the region.
Despite these promises, industry participants expressed concerns that the goal of transitioning to renewable energy in the steel sector would be difficult to achieve if electricity costs remain high. The steel industry’s push for a uniform electricity policy to support the use of renewable energy faces challenges due to the disparities in power rates across regions.
ScrapInsight Commentary
India’s secondary steelmakers are caught in a bind, with tax issues and rising energy costs impeding the sector’s growth. The proposed tax reforms could help increase the domestic supply of scrap, which is critical for India’s green steel ambitions. However, the challenge of reducing power costs and improving energy efficiency remains a major hurdle for the industry.
