Looking for expert help with Income tax for scrap dealers India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Who is this guide for? If you are a scrap dealer, kabadiwala, metal recycler, paper scrap trader, e-waste dismantler, or any business owner buying and selling waste materials and scrap in India, this guide covers your complete income tax obligations for AY 2026-27 (FY 2025-26): income classification, Section 44AD presumptive taxation, TCS on scrap under Section 394 (previously Section 206C), GST reverse charge on metal scrap, HSN codes, business code selection, and ITR filing.
India's scrap and recycling industry is estimated at Rs 1 lakh crore annually, with lakhs of dealers ranging from neighbourhood kabadiwalas buying household waste to large metal scrap yards supplying steel plants. Despite this scale, scrap dealers face some of the most complex tax compliance requirements of any trading business. You must collect TCS from buyers at 2% on every sale, pay GST under reverse charge when buying from unregistered suppliers, handle GST TDS when buying from registered sellers, and navigate the interaction between income tax TDS under Section 194Q and TCS under Section 394. This guide covers every obligation from buying scrap to filing your ITR.
If you are in a related business, see also our guides for auto mechanics and garage owners, shopkeepers and kirana store owners, and flour mill and rice mill owners.
How Scrap Dealers Earn Income
Scrap dealing generates income through the buy-sell margin on waste materials. The margin varies significantly by scrap type:
Tax Rate Chart
Common Revenue Streams for Scrap Dealers
Typical margin ranges; actual margins depend on market prices, volume, and processing
Non-Ferrous Metal Scrap (Copper, Aluminium, Brass)
Higher margin; copper scrap trades at Rs 500-700/kg, aluminium at Rs 100-180/kg
Ferrous Metal Scrap (Iron, Steel, MS)
High volume, lower margin; MS scrap trades at Rs 28-38/kg depending on grade
Paper and Cardboard Scrap
Newspaper, corrugated boxes, office paper; Rs 12-22/kg
Plastic Scrap (PET, HDPE, PP, PVC)
PET bottles, HDPE drums, industrial plastic waste; Rs 15-60/kg by grade
E-Waste (Electronic Scrap)
Printed circuit boards, used batteries, computer parts; requires authorisation
Rubber, Glass, and Other Scrap
Used tyres, glass bottles, textile waste
Source: Industry estimates based on MSTC pricing data and scrap market rates (FY 2025-26)
A small kabadiwala or neighbourhood scrap collector buying from households and small shops earns Rs 5 lakh to Rs 15 lakh per year in turnover. A mid-size scrap dealer with a godown handling bulk metal or paper scrap earns Rs 30 lakh to Rs 2 crore. A large scrap yard or recycling unit supplying directly to steel plants, paper mills, or plastic recyclers can earn Rs 5 crore to Rs 50 crore or more annually.
Income Classification and Presumptive Taxation
Scrap dealing is trading income. It falls under business income, not professional income. Section 44AD (Section 58 under the Income Tax Act 2025) applies.
Business code for scrap dealers
Tax Rate Chart
Business Codes for ITR Filing
Select the correct code in ITR-4 or ITR-3
02001 - Wholesale Trade (Others)
Dealers buying scrap in bulk and selling to factories, mills, or larger traders
02002 - Retail Trade (Others)
Kabadiwalas buying from households and selling to larger dealers
Source: CBDT Business Code List for ITR Filing (AY 2026-27); see full list at Tax Garden business code guide
Most scrap dealers with godowns and bulk operations use 02001 because their primary activity is wholesale trading of scrap materials. A small kabadiwala collecting scrap from households may use 02002. See the business code list for the complete reference.
For GST registration and Udyam (MSME) registration, use NIC code 46699 (wholesale of metal and non-metal waste and scrap).
Section 44AD presumptive taxation
Tax Rate Chart
Deemed Profit Rates Under Section 44AD (Section 58, ITA 2025)
Scrap trading business income
Digital Receipts (UPI, Bank Transfer, NEFT, RTGS)
Payment received via account-payee cheque, bank draft, or electronic mode
Cash Receipts
Cash payments and non-account-payee cheques
Source: Section 58(2), Table Sl. No. 1, Income Tax Act 2025
Eligibility conditions
- You must be an individual, HUF, or partnership firm (not LLP).
- Your total turnover must not exceed Rs 2 crore in the financial year. If cash receipts are 5% or less of total turnover, the limit increases to Rs 3 crore.
- Your business must not be commission, brokerage, or agency. Scrap trading qualifies.
The critical question: Is 44AD beneficial for scrap dealers?
This is where scrap dealers differ from most other businesses in this profession guide series. Most businesses (restaurants, salons, repair shops) have margins of 30% to 60%, making the 6-8% deemed profit under Section 44AD very attractive. Scrap dealers, especially in ferrous metals, often have actual net margins of 5% to 15%.
Comparison
Section 44AD vs Actual Books: Ferrous Scrap Dealer
Annual turnover Rs 1.5 crore; 80% digital receipts; actual net margin 8%
| Component | Section 44AD | Actual Books (ITR-3) |
|---|---|---|
| Total Turnover | Rs 1,50,00,000 | Rs 1,50,00,000 |
| Digital Receipts (80%) | Rs 1,20,00,000 | - |
| Cash Receipts (20%) | Rs 30,00,000 | - |
| Deemed/Actual Profit | Rs 9,60,000 (6% + 8%) | Rs 12,00,000 (8% actual) |
| Tax (New Regime, after rebate) | Nil (below Rs 12 lakh) | Nil (below Rs 12 lakh) |
| Books Required? | No | Yes (full books + audit if above Rs 1 crore) |
Source: Section 58(2), Income Tax Act 2025; Section 44AB audit threshold
For a small to mid-size ferrous scrap dealer with turnover under Rs 2 crore and actual margins below 8%, Section 44AD's deemed profit may be higher than actual profit. Even so, the simplicity of not maintaining books and avoiding tax audit under Section 44AB may outweigh the marginal tax difference. For dealers with turnover above Rs 2 crore, or non-ferrous dealers with margins well above 8%, the decision is clearer.
Comparison
Section 44AD vs Actual Books: Non-Ferrous Scrap Dealer
Annual turnover Rs 80 lakh; 90% digital receipts; actual net margin 22%
| Component | Section 44AD | Actual Books (ITR-3) | |
|---|---|---|---|
| Total Turnover | Rs 80,00,000 | Rs 80,00,000 | |
| Digital Receipts (90%) | Rs 72,00,000 | - | |
| Cash Receipts (10%) | Rs 8,00,000 | - | |
| Deemed/Actual Profit | Rs 4,96,000 | Rs 17,60,000 | |
| Tax (New Regime) | Nil (below Rs 12 lakh) | Rs 54,600 (after rebate and cess) | |
| Books Required? | No | Yes |
Source: Section 58(2), Income Tax Act 2025
For non-ferrous dealers, Section 44AD is significantly more beneficial because the actual margin (22%) far exceeds the deemed profit (6-8%).
When to opt out of Section 44AD
If your actual expenses are high (transport, godown rent, labour, weighing charges, brokerage) and your net margin is genuinely below 6%, you can declare income lower than the deemed rate by maintaining full books and filing ITR-3. You must then get a tax audit if turnover exceeds Rs 1 crore (Rs 2 crore if cash receipts are under 5%). Also note the continuity clause: once you opt for Section 44AD, you must continue for 5 consecutive years.
TCS on Scrap Sales: Section 394 (Previously 206C)
This is the most important compliance obligation unique to scrap dealers. As a scrap seller, you must collect Tax Collected at Source (TCS) from your buyer on every sale.
TCS rate and applicability
Tax Rate Chart
TCS on Scrap Sale Under Section 394(1)
Effective April 1, 2026 (previously Section 206C(1))
TCS on Scrap (Buyer has PAN)
Increased from 1% to 2% from April 1, 2026; collect on total sale value
TCS on Scrap (Buyer without PAN)
Higher rate under Section 397 if buyer fails to furnish PAN
Source: Section 394(1), Income Tax Act 2025; Finance Act 2026
How TCS works in practice
You sell ferrous scrap worth Rs 5 lakh to a buyer. You collect TCS at 2% = Rs 10,000 over and above the sale price. The buyer pays you Rs 5,10,000. You deposit the Rs 10,000 TCS to the government and issue Form 27D (TCS certificate) to the buyer.
Step-by-Step Guide
TCS Compliance for Scrap Sellers
Collect TCS at 2%
Add TCS to the invoice amount at 2% of sale value. If buyer lacks PAN, collect at 5%.
Deposit TCS by 7th of next month
Deposit collected TCS using Challan 281. Due by the 7th of the month following the month of collection.
File Form 27EQ quarterly
File TCS return in Form 27EQ by the 15th of the month following the quarter end (July 15, Oct 15, Jan 15, May 15).
Issue Form 27D to buyer
Issue TCS certificate to the buyer within 15 days from the due date of filing Form 27EQ.
Form 27C exemption: When TCS is not required
No TCS needs to be collected if the buyer furnishes a declaration in Form 27C to you (the seller) stating that the scrap will be used for manufacturing, processing, production, or power generation and not for trading purposes.
A steel plant buying iron scrap for its furnace provides Form 27C. You do not collect TCS on that transaction. But if a trader buying the same scrap for resale does not provide Form 27C, you must collect TCS at 2%.
You must submit a copy of every Form 27C received to your jurisdictional assessing officer by the 7th of the following month.
TCS vs TDS under Section 194Q
When a buyer's previous-year turnover exceeds Rs 10 crore and purchases from you exceed Rs 50 lakh in a year, the buyer deducts TDS at 0.1% under Section 194Q. TDS under Section 194Q takes precedence over TCS under Section 394. You do not collect TCS on transactions where the buyer has deducted TDS under 194Q.
For most small and mid-size buyers whose turnover is below Rs 10 crore, Section 194Q does not apply, and you must collect TCS.
GST on Scrap: Rates, HSN Codes, and RCM
GST rates by scrap type
Tax Rate Chart
GST Rates on Scrap Materials
HSN codes and applicable GST rate
Iron and Steel Scrap (HSN 7204)
Ferrous waste and scrap, remelting scrap ingots
Aluminium Scrap (HSN 7602)
Aluminium waste and scrap
Copper Scrap (HSN 7404)
Copper waste and scrap, including brass scrap
Plastic Scrap (HSN 3915)
PET, HDPE, PP, PVC, and other plastic waste
E-Waste (HSN 8549)
Electronic waste, printed circuit boards, used batteries
Paper Scrap (HSN 4707)
Waste paper, corrugated cardboard, newspaper scrap
Rubber Scrap (HSN 4004)
Rubber waste, used tyres for recycling
Source: CBIC GST Rate Schedule; HSN Classification (as of September 2026)
Reverse Charge Mechanism (RCM) on metal scrap
This is the most critical GST compliance for scrap dealers. If you are a registered dealer purchasing metal scrap (Chapters 72 to 81) from an unregistered supplier, you must pay GST at 18% under RCM. This was introduced by Notification 06/2024-Central Tax (Rate) dated October 8, 2024, effective from October 10, 2024.
Comparison
Metal Scrap Purchase: Regular vs RCM
Who pays GST depends on supplier registration status
| Scenario | GST Liability | ITC Available? |
|---|---|---|
| Purchase from registered supplier | Supplier charges GST on invoice (forward charge) | Yes, claim ITC on supplier invoice |
| Purchase from unregistered supplier (kabadiwala, household) | You pay GST at 18% under RCM | Yes, claim ITC on self-assessed RCM tax |
| Purchase from unregistered supplier (non-metal scrap) | No RCM; supplier below threshold exempt | No ITC available |
Source: Notification 06/2024-CT(R) dated October 8, 2024; applicable to Chapters 72-81
Important: RCM on metal scrap applies only to Chapters 72 to 81 (metals: iron, steel, copper, nickel, aluminium, lead, zinc, tin, and other base metals). Paper scrap, plastic scrap, rubber scrap, and e-waste are not covered under this RCM notification. For non-metal scrap purchased from unregistered suppliers, the general exemption for unregistered small suppliers applies.
GST TDS on metal scrap (Section 51 CGST)
In addition to RCM, registered buyers purchasing metal scrap from registered sellers must deduct GST TDS at 2% under Section 51 of the CGST Act. This was introduced by Notification 25/2024-Central Tax dated October 10, 2024.
Tax Rate Chart
GST TDS on Metal Scrap (Section 51 CGST)
Applicable when both buyer and seller are registered
Intra-State Purchase
Deducted on taxable value excluding GST
Inter-State Purchase
Deducted on taxable value excluding GST
Source: Notification 25/2024-CT dated October 10, 2024; Section 51 CGST Act
GST TDS applies when the total value of taxable metal scrap supplies under a single contract exceeds Rs 2.5 lakh. The buyer must file GSTR-7 by the 10th of the following month and issue a TDS certificate. The deducted amount is credited to the supplier's electronic cash ledger.
GST registration threshold
Scrap dealers who trade in goods must register for GST when turnover exceeds Rs 40 lakh in most states (Rs 20 lakh in special category states). However, if you also provide sorting, dismantling, or processing services, the services threshold of Rs 20 lakh applies.
Mandatory registration regardless of turnover: If you make inter-state sales of scrap (selling to buyers in other states), GST registration is mandatory irrespective of turnover.
E-way bill for scrap movement
An e-way bill is required when transporting scrap worth more than Rs 50,000 in a single consignment for inter-state movement. Intra-state thresholds vary by state. Scrap dealers transporting bulk metal or paper scrap regularly should generate e-way bills for every consignment exceeding the threshold.
Key Deductible Expenses for Scrap Dealers
If you maintain books and file ITR-3 instead of using Section 44AD, the following expenses are deductible:
Comparison
Common Deductible Expenses for Scrap Dealers
Claimed when filing ITR-3 with actual computation
| Expense Category | Examples | Documentation Required |
|---|---|---|
| Purchase cost of scrap | Price paid to suppliers, kabadiwalas, households, factories | Purchase invoices, payment receipts, weighment slips |
| Transport and freight | Truck hire, auto charges, loading and unloading | Transport bills, lorry receipts, freight invoices |
| Godown and yard rent | Warehouse rent, yard lease, storage charges | Rent agreement, rent receipts |
| Labour and wages | Sorting labour, loading workers, segregation staff | Wage register, attendance records, payment receipts |
| Weighing and brokerage | Weighbridge charges, broker commission, market fees | Weighment slips, broker invoices |
| Vehicle expenses | Fuel, maintenance, insurance for transport vehicles | Fuel bills, repair invoices, insurance copies |
| Depreciation | Weighing machines (15%), vehicles (15%), computers (40%), godown furniture (10%) | Asset register, purchase invoices |
| Insurance | Godown fire insurance, stock insurance, vehicle insurance | Policy documents, premium receipts |
| Interest on business loans | Working capital loan interest, vehicle loan EMI interest | Bank statements, loan account statements |
| Cash payment limit | Payments above Rs 10,000 in cash per day per person are disallowed under Section 40A(3) | Keep all purchases below Rs 10,000 per day per supplier in cash |
Source: Income Tax Act 2025, Sections 37-43
Section 40A(3): Cash payment limit
Section 40A(3) is especially important for scrap dealers. When you buy scrap from kabadiwalas, ragpickers, or small collectors, payments are often in cash. Any single cash payment exceeding Rs 10,000 per day per person is disallowed as a business expense. For scrap dealers with high-volume cash purchases from multiple small suppliers, this means:
- Keep individual cash payments at or below Rs 10,000 per supplier per day.
- Payments via account-payee cheque, bank draft, NEFT, RTGS, or UPI have no such limit.
- Maintain a proper purchase register with supplier names, amounts, and payment mode for every transaction.
Section 43B(h): MSME payment compliance
If your scrap suppliers are registered MSMEs, you must pay them within 45 days (if there is a written agreement) or 15 days (without agreement) under Section 43B(h). Payments made after these deadlines cannot be claimed as expenses in the year of purchase. This is especially relevant for large scrap dealers buying from smaller MSME scrap collectors or recyclers.
Advance Tax for Scrap Dealers
If you opt for Section 44AD, you must pay 100% advance tax by March 15 in a single instalment. If you maintain actual books, the standard quarterly schedule applies:
Tax Rate Chart
Advance Tax Due Dates
For scrap dealers maintaining actual books (not Section 44AD)
June 15
First instalment
September 15
Second instalment
December 15
Third instalment
March 15
Final instalment
Source: Section 207-211, Income Tax Act 2025
Failure to pay advance tax on time attracts interest under Section 234B and 234C at 1% per month. See the advance tax due dates guide for detailed calculations.
ITR Filing Checklist for Scrap Dealers
Step-by-Step Guide
Pre-Filing Checklist for Scrap Dealers
Reconcile TCS with Form 27EQ
Ensure all TCS collected during the year matches your quarterly Form 27EQ filings. Cross-check TCS deposited against Challan 281 receipts.
Check Form 26AS and AIS
Verify TDS deducted by buyers under Section 194Q appears in your Form 26AS. Check the Annual Information Statement (AIS) for all reported transactions.
Reconcile GST returns with sales
Match your GSTR-1 outward supplies with your income tax return turnover. Mismatches trigger notices.
Verify RCM payments
Confirm GST paid under reverse charge on metal scrap from unregistered suppliers is claimed as ITC in GSTR-3B.
Choose regime: Old vs New
Compare tax liability under both regimes. Most scrap dealers with turnover under Rs 12 lakh benefit from the new regime with Section 87A rebate.
File ITR-4 or ITR-3 before deadline
ITR-4 for Section 44AD (due July 31). ITR-3 with tax audit (due October 31). Late filing attracts fee under Section 234F.
Common Mistakes Scrap Dealers Make
-
Not collecting TCS on scrap sales. The 2% TCS under Section 394 is mandatory. Failure to collect and deposit TCS makes you liable as a defaulter with penalty and prosecution risk.
-
Accepting Form 27C from traders. Form 27C exempts TCS only when the buyer uses scrap for manufacturing, processing, or power generation. If a buyer who is clearly a trader (reseller) provides Form 27C, you are still liable if the department finds the declaration false. Verify the buyer's business nature before accepting Form 27C.
-
Not paying GST under RCM on purchases from unregistered suppliers. Metal scrap from unregistered kabadiwalas, ragpickers, and household sellers requires you to self-assess and pay 18% GST under reverse charge. Many dealers skip this because no invoice is raised by the unregistered supplier.
-
Cash purchases above Rs 10,000. Scrap dealers routinely buy from small suppliers in cash. Every payment above Rs 10,000 per day per supplier is disallowed under Section 40A(3). This can increase your taxable income significantly.
-
Mismatched GST and income tax turnover. Your GSTR-1 turnover must match your ITR turnover. Scrap dealers who under-report in GST or income tax face reconciliation notices.
-
Not filing TCS returns on time. Form 27EQ is due quarterly. Late filing attracts a fee of Rs 200 per day under Section 234E (capped at the TCS amount). Non-filing within the due date also means you cannot issue Form 27D to buyers, delaying their TCS credit.
-
Ignoring the GSTR-7 filing obligation for GST TDS. If you buy metal scrap from registered sellers and the contract exceeds Rs 2.5 lakh, you must deduct GST TDS at 2% and file GSTR-7 monthly by the 10th.
Business Structure Comparison
Comparison
Business Structure for Scrap Dealers
Tax and compliance implications
| Factor | Proprietorship | Partnership Firm | Private Limited / LLP |
|---|---|---|---|
| Section 44AD eligible? | Yes | Yes (firm, not LLP) | No (LLP); No (Pvt Ltd) |
| Tax rate (new regime) | Slab rates (0-30%) | 30% flat on firm income | 25% corporate tax + surcharge |
| TCS obligation | Same | Same | Same |
| GST registration | PAN-based | Firm PAN-based | Company/LLP PAN-based |
| Compliance burden | Lowest | Medium (partnership deed, ITR-5) | Highest (ROC, audit, ITR-6) |
| Liability | Unlimited personal | Unlimited (partners) | Limited to share capital |
| Recommended for | Turnover below Rs 2 crore | Rs 2-10 crore with partners | Rs 10 crore+ or investor-backed |
Source: Income Tax Act 2025; Companies Act 2013; LLP Act 2008
Most scrap dealers start as proprietorships and only move to a partnership or company structure when turnover exceeds the Section 44AD limit or when they need limited liability for large contracts with steel plants and manufacturers.
Record-Keeping Checklist
Even under Section 44AD (where books are not mandatory), maintain these records:
- Purchase register: Every scrap purchase with date, supplier name, address, PAN (if available), quantity, rate, amount, and payment mode.
- Sales register: Every sale with date, buyer name, GSTIN, quantity, rate, amount, TCS collected, and payment mode.
- Weighment slips: Weighbridge tickets for every purchase and sale, signed by both parties.
- TCS register: TCS collected from each buyer, challan numbers, deposit dates, Form 27C received (if any).
- Bank statements: All business account statements showing receipts and payments.
- GST returns: Copies of GSTR-1, GSTR-3B, GSTR-7 (if GST TDS applicable), and RCM payment records.
- Form 27EQ copies: Quarterly TCS returns filed with the department.
New Income Tax Act 2025: Section Mapping for Scrap Dealers
The Income Tax Act 2025 replaced the 1961 Act from April 1, 2026. Key sections relevant to scrap dealers have been renumbered:
Comparison
Old vs New Section Numbers for Scrap Dealers
Income Tax Act 1961 to Income Tax Act 2025
| Provision | Old Section (1961 Act) | New Section (2025 Act) |
|---|---|---|
| TCS on scrap | 206C(1) | 394(1) |
| Presumptive taxation | 44AD | 58 |
| Tax audit | 44AB | 56 |
| Cash payment disallowance | 40A(3) | 35(3) |
| MSME payment compliance | 43B(h) | 38(h) |
| TDS on purchase of goods | 194Q | 393 |
| Specified professions (not applicable) | 44AA | 62 |
| Advance tax | 208-211 | 371-374 |
| Late filing fee | 234F | 435 |
Source: Income Tax Act 2025 Section Mapping; see full mapping at Tax Garden section mapping guide
For detailed mapping of all sections, see our Income Tax Act 2025 section mapping guide. Both old and new section numbers are valid for AY 2026-27 returns as the transition is ongoing.
Tax Regime Comparison for Scrap Dealers
Most scrap dealers with income under Rs 12 lakh benefit from the new tax regime due to the Section 87A rebate. Dealers with higher incomes who have significant deductions (home loan interest under Section 24, insurance under Section 80C, health insurance under Section 80D) may benefit from the old regime.
Comparison
Tax Liability: Scrap Dealer with Rs 10 Lakh Taxable Income
After standard deduction (if salaried income also exists) and rebate
| Component | New Regime | Old Regime (with deductions) |
|---|---|---|
| Taxable Income | Rs 10,00,000 | Rs 10,00,000 |
| Less: Section 80C/80D/24(b) | Not available | Up to Rs 3,00,000 (if claimed) |
| Net Taxable Income | Rs 10,00,000 | Rs 7,00,000 |
| Tax Before Rebate | Rs 60,000 | Rs 52,500 |
| Section 87A Rebate | Full (income below Rs 12 lakh) | Rs 12,500 (old regime limit) |
| Tax Payable | Nil | Rs 40,000 + cess |
| Verdict | Better for most scrap dealers | Only if deductions exceed Rs 3 lakh |
Source: Income Tax Act 2025; Finance Act 2026
For scrap dealers filing under Section 44AD with deemed income well under Rs 12 lakh, the new regime with 87A rebate typically results in zero tax.
Filing your ITR correctly as a scrap dealer requires tracking TCS on sales, GST RCM on purchases, GST TDS on metal scrap, and the interaction between Sections 194Q and 394. If this sounds complex, it is. Consider professional help to ensure every TCS is deposited on time and every Form 27EQ is filed before the deadline. A missed TCS deposit attracts not just interest but potential prosecution under Section 276BB.
For the latest advance tax due dates, GST return calendar, and ITR filing deadlines, check our dedicated guides.
