GST on sale of manufacturing scrap is applicable under Section 7 of the CGST Ac, If you are a manufacturer selling scrap generated during production, this guide explains GST applicability, correct HSN code selection, ITC eligibility, and compliance requirements.
Sale of manufacturing scrap is a fully taxable supply under GST and frequently examined during audits.
Is GST Applicable on Sale of Manufacturing Scrap?
Yes.
Under Section 7 of the CGST Act, supply includes sale of goods in the course or furtherance of business.
Scrap generated during manufacturing and sold is treated as taxable outward supply.
Therefore:
✔ GST must be charged
✔ Correct HSN must be mentioned
✔ Reported in GSTR-1
Why Scrap Sale Cannot Be Treated as Exempt
Many small manufacturers wrongly assume scrap is “waste” and not taxable.
This is incorrect because:
- Scrap has commercial value
- It is sold for consideration
- It arises during business activity
Hence it is taxable.
Correct HSN Code for Manufacturing Scrap
Scrap must be classified based on material composition.
Examples:
| Scrap Type | 6 Digit HSN | GST Rate |
|---|---|---|
| Iron scrap | 720449 | 18% |
| Aluminium scrap | 760200 | 18% |
| Plastic scrap | 391510 | 18% |
| Paper scrap | 470790 | 12% |
For detailed classification, refer to our main Scrap HSN Code guide.
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GST Rate on Manufacturing Scrap
Generally:
- Metal scrap → 18%
- Plastic scrap → 18%
- Paper scrap → 12%
Always verify latest rate notification.
Example – GST Calculation on Scrap Sale
A manufacturer sells iron scrap worth ₹3,00,000.
HSN: 720449
GST Rate: 18%
GST payable = ₹54,000
Total invoice value = ₹3,54,000
This must be reported in GSTR-1 and tax paid in GSTR-3B.
Is Reverse Charge Applicable?
Normally, manufacturing scrap sold by registered manufacturer to registered buyer → forward charge applies.
RCM applies only if covered under specific notification under Section 9(3).
For detailed legal analysis, refer to our Section 9(3) guide.
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ITC on Manufacturing Scrap – Important Clarification
Question: If raw material ITC was claimed, do we need to reverse ITC on scrap?
Answer: No.
Because:
- Scrap sale is taxable
- Output GST is paid
- No ITC reversal required
However, if capital goods are sold as scrap, separate rules may apply.
Compliance Checklist for Manufacturers
✔ Maintain scrap generation register
✔ Classify correctly under 6-digit HSN
✔ Charge correct GST rate
✔ Generate tax invoice
✔ Generate e-way bill if required
✔ Report correctly in GSTR-1
For transport compliance, refer to our E-way Bill guide.
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Common GST Notice Issues in Scrap Cases
- Scrap sale not reported in GSTR-1
- Wrong HSN code used
- Wrong GST rate charged
- Under-valuation of scrap
- Mismatch between stock register and sales
During audit, officers verify:
- Production records
- Scrap register
- E-way bills
- GSTR-1 HSN summary
Penalty Exposure
If scrap sale suppressed:
- Demand under Section 73 or 74
- Interest under Section 50
- Penalty under Section 122
Hence proper reporting is critical.
Frequently Asked Questions
Is GST mandatory on factory scrap sale?
Yes, it is taxable supply.
Can scrap be sold without invoice?
No. Tax invoice is mandatory.
Is ITC reversal required on scrap?
No, if scrap sale is taxable.
Is scrap sale considered business income?
Yes, for GST and income tax purposes.
Legal Provisions Governing GST on Sale of Manufacturing Scrap
GST on sale of manufacturing scrap is governed by:
-
Section 7 of the CGST Act (definition of supply)
-
Section 9 of the CGST Act (levy of tax)
-
Notification No. 1/2017-CT (Rate)
-
HSN classification under GST Tariff
Scrap generated during manufacturing and sold for consideration qualifies as taxable outward supply.
When Can Department Raise Notice on Scrap Sale?
During audit, officers may verify:
-
Scrap generation register
-
Production records
-
HSN summary in GSTR-1
-
E-way bill details
-
Valuation method
Failure to report GST on sale of manufacturing scrap may lead to demand under Section 73 or 74.
Valuation of Manufacturing Scrap Under GST
Scrap must be valued at transaction value under Section 15 of CGST Act.
Undervaluation to reduce tax liability may attract penalty.
Conclusion
Sale of manufacturing scrap is a taxable outward supply under GST. Correct HSN classification, proper invoicing, and accurate return reporting are essential to avoid audit disputes and penalties.
For correct Scrap HSN Code selection, refer to our detailed classification guide.
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