India's GST system is hindering the circular economy by taxing recycled materials at the same rate as virgin ones, discouraging sustainable practices.
This policy failure forces recycling businesses into the informal sector, costing the government significant revenue and exploiting workers.
Reforming GST rates could boost the economy and improve conditions for millions of waste workers.
India’s tax system is undermining its own environmental goals. Under the current Goods and Services Tax (GST) system, a company that turns discarded plastic bottles into new products pays the same tax rate as one that uses virgin plastic. This serious policy failure affects all recycled materials—metal, e-waste, and several other waste streams—treating companies that help the environment the same as those that harm it.
The analogy is stark: imagine taxing someone who refurbishes old furniture at the same rate as someone who cuts down fresh trees. This is precisely what India’s GST policy does to its circular economy aspirations.
The results are serious and far-reaching. Industries choose fresh materials over recycled ones because why make procurement difficult when both carry the same tax burden? Recycling businesses, hit hard by the high 18 per cent GST rates, move into the informal economy. The result is a harmful cycle where millions of waste workers work in dangerous conditions using old technology, while the government loses tax revenue.
Only the unscrupulous benefit from this broken system—those engaged in fake invoicing and tax evasion thrive while legitimate businesses struggle to compete.
This isn’t just a local governance problem, though the evidence is all around us every time we step outside and see waste scattered across our streets. At its heart, this is a policy failure that needs urgent correction. Building a circular economy requires the government to stop punishing the very activities it should be encouraging.
Delhi-based think tank Centre for Science and Environment’s crucial study ‘Relax the Tax’ shows how India’s failure to treat recycled and fresh materials differently is blocking the move to a circular economy. The research reveals a shocking truth: changing GST rates for industrial waste could bring in huge government revenue while improving conditions for millions of informal waste workers.
Small-scale scrap dealers cannot afford the crippling 18 per cent GST, forcing them into cash-based, untaxed operations. This creates market distortion where law-abiding businesses cannot compete with tax-evading operators. The informal sector’s dominance costs the government an estimated Rs 65,000 crore annually in lost GST revenue—a figure projected to balloon to Rs 86,700 crore by 2035 without intervention.
But the human cost runs even deeper. Millions of informal workers handle hazardous materials like batteries and e-waste without safety equipment or fair wages. They lack social security, healthcare access, and basic worker protections. Formalising their operations isn’t just economically sensible—it’s a moral imperative.
The August 12, 2025, release of CSE’s report laid bare additional systemic failures. GST officials alleged to discourage compliant recycling companies from working with informal operators due to valid traceability issues. Widespread fraud flourishes through fake invoicing while honest businesses receive no incentives and often lose money under the punitive tax structure. Despite wanting to join formal operating frameworks, informal sector workers are blocked by overwhelming compliance requirements and prohibitive tax rates.
Nivit Kumar Yadav, programme director of CSE’s Industrial Pollution team, captures the broader tragedy: “Our research shows that the current GST structure is inadvertently penalising the very sectors that could drive India’s transition to a circular economy. The 18 per cent tax on e-waste and metal scrap is particularly counterproductive when we are trying to build a robust secondary materials market. By rationalising these rates, we’re not just talking about tax reform—we’re talking about unlocking India’s potential as a global leader in sustainable manufacturing.”
The current system is financially harmful. The government loses twice what it collects from the waste sector—a loss that gets worse each year. But the solution is within reach. By lowering GST rates and bringing the sector into formal operations, India can turn this Rs 65,000 crore annual loss into an Rs 1.8 lakh crore opportunity while delivering environmental and social benefits to millions.
The CSE study provides the roadmap. Different scenarios considered in the report show the potential. International examples prove the concept works. What’s missing is political courage to challenge established interests and bureaucratic resistance.
India stands at a crossroads. Continue with a tax policy that undermines environmental goals, perpetuates worker exploitation, and drains tax money? Or embrace reform that could position the nation as a global leader in sustainable manufacturing while generating massive economic benefits?
The choice should be obvious. The only question is whether policymakers have the vision and will to act.