GST(Goods and Services Tax)Written by Saahas
October 14th, 2019, saw the Goods and Services Tax (GST) Council convene in Goa, with the industry watching on with bated breath. The Indian economy hit a six-year low of 5 percent in the first quarter of the 2019 financial year. The Union Ministry hastened to launch a financial stimuli package in June 2019, while reducing the GST on consumer goods to boost domestic consumption.
Around the same time, the government was planning to ban certain single-use plastics to reduce plastic waste generation. The Prime Minister, in his Independence Day speech in August 2019, urged citizens to shun single-use plastic. A supposed watershed moment for sustainability and environmental consciousness for India, given that 60 major cities in the country generate around 25,950 tonnes of plastic waste in a day[i].
The proposed plastic ban was shelved amidst pressure from the industry and a fear of the economic slowdown. However, these GST tax rebates will create liquidity in the domestic economy and increase demand for consumer goods- meaning an increase in the quantum of waste generated. Thus, while waste management is becoming one of the biggest challenges for the government, economic policies continue to drive waste generation.
The need of the hour is for the government to realign its economic policies with India’s international commitments towards sustainable development, GHG emission reduction targets, and state-level action on waste control. A transition towards a circular economy is necessary to achieve these goals. We must evaluate our preparedness in transitioning to a circular economy, strategies to prevent waste generation and the crucial government support to the recycling industry. Concurrently, there is a need to assess whether the recycling industry is equally incentivized to handle the quantum of waste generated in our cities and villages.
India’s Plastic Challenge
Plastic consumption, due to its ubiquitous use across sectors, is a proxy of a country’s economic growth. However, it is also a mounting problem for our cities- aggravated by a broken municipal plastic waste collection and processing infrastructure. A versatile and durable material, plastic is the most common and cheapest raw material used in the production of consumer and industrial goods.
Despite bringing in regulatory measures such as the Solid Waste Management Rules, 2016, and mandating the Extended Producer Responsibility (EPR), to augment the process of resource recovery, the country continues to struggle to manage its waste. The Central Pollution Control Board estimates that of the 80 percent plastic waste collected by the municipalities in 2014, only 28.4 percent was treated[ii].
According to a recent Forbes report, an average Indian uses approximately 11 kg of plastic in a year[iii]. Developed nations like the USA have ten times per capita consumption compared to India. The industrial sector uses an estimated 74 lakh kgs of plastics annually[iv], 43 percent of which is utilized in manufacturing single-use packaging material. A substantial portion of the plastic waste generated consists of thermoplastics, such as PET (polyethylene terephthalate) and PVC (polyvinyl chloride). These are high-value plastic recyclables used in the energy recovery process or down-cycled as secondary raw materials.
We have only managed to recycle about 18 lakh kgs of our plastic waste. The rest of the plastic waste is disposed of in landfills, open dumps or find its way into water bodies. Burning plastic waste releases toxic fumes such as dioxins, furans, mercury, and Polychlorinated Biphenyls. Dioxin is a lethal carcinogen that causes cancer and neurological damage and aggravates respiratory ailments in patients.
The unabated increase of plastic waste is matched by the growth prediction for the plastic industry in India. E-waste and automobile scrap see similar predicted growth trajectories. A study by FICCI[v] points out that our fast-growing consumption has outstripped India’s current capacity to recycle plastics.
Recycling Industry’s Contribution to India’s Waste Management
India’s currently high recycling rates in certain categories are largely due to the role played by the informal sector consisting of waste workers, scrap dealers, and recyclers who trade in a scrap of all sorts. The sector has independently, without any support or incentives from the government managed to push the agenda of the circular economy in the country. Through myriad channels of dealers, waste and scrap are collected, sorted, then further processed by formal and informal players, located across the country, into secondary raw material, or utilized in the energy recovery process.
India’s informal recycling economy, despite the lack of government support, has managed to flourish because it chooses to focus on more lucrative scrap material which is easier to gather and process locally. The informal recycling industry handles close to 95 percent of the e-waste[vi] and 70 percent of the plastic waste[vii] of the country, recovering precious metals like gold, silver, copper, palladium, aluminum, and cobalt. The waste workers collect scrap from the doorstep of households, as well as from point sources, to retrieve and recover the material, covering more ground than most municipal agencies.
Their margins are dependent on factors like the quality of scrap collected, levels of contamination, operational cost, and most importantly the market demand of the scrap material. In the current scenario, apart from a handful of authorized recyclers, most of the informal recyclers operate with crude and rudimentary technology, with minimal value addition to the scrap as secondary raw material.
How the Current Tax Structure Disincentivizes The Sector:
All these efforts of the recycling industry come amidst government efforts to increase GST revenue by taxing industrial and commercial activity. The current GST regime imposes a 5 percent tax on most metal and plastic scrap. The GST on recyclables even at 5 percent disrupts the level playing field for the recycling sector as secondary materials when compared to tax-free primary material or duty-free imported materials. For instance, Indian paper mills prefer to import paper scrap from the USA than procuring the same locally because of the lower price and lower contamination levels.
US EPA’s study “Federal Disincentives: A Study of Federal Tax Subsidies and Other Programme Affecting Virgin Industries and Recycling”[viii], recognized the tax advantage for virgin materials, when compared to secondary materials, posed a serious obstacle to recycling. The relative price of secondary materials as compared to virgin resins is a key driver for increased performance of the recycling chain. In the current scenario, the relatively low economic value of these materials in the market, when taking into account the cost incurred in collection and recycling, is an obstacle in improving the collection and recovery rates of scrap. Augmenting demand for secondary materials, higher profit margins will ensure investment in greater quality control mechanisms in the material recovery process.
Recycling is only one part of the loop of the circular economy. Only when the end-user becomes willing to buy recycled secondary material is the loop closed. To build demand for recycled material, it must be competitive with virgin materials. In the present market conditions, the recycled secondary material or products in the market are competing against other secondary materials rather than the virgin material. A move to exempt recycled goods from taxation n structures like GST will not just create a level field in the market, but also send a strong message to the world about India’s commitment towards a circular economy.
Incentivizing Recycling Across the World
The developed countries over the last few decades have gone beyond the conventional command and control mechanism and innovatively used various policy instruments to mitigate the environmental impact of consumer goods. Amongst which is the Extended Producers Responsibility (EPR), which seeks to make the producer responsible for the product recovery and end-of-life of products they generate.
The EPR model has been widely replicated, albeit with modification, across Europe. The UK uses the Packaging Recovery Notes (PRNs), a system that requires the plastic packaging manufacturers or manufacturers to get certificates of recovery from authorized recyclers. The latter issue certificates to manufacturers for a fee, thereby enabling a system of collection and processing of plastic packaging waste. The waste collection is formalized through this process, and tracked by the government agencies to assess plastic generation and subsequent recovery. Their recycling policy is based on the polluter-pays principle, taxing waste generators to pay for its disposal. Those industries whose products are difficult to reuse or recycle invite a levy of higher tax.
Sweden and the Netherlands have a similar incentive-based deposit-return scheme. Sweden’s recycling program started in the mid-1980s, intensively invested in segregation and collection efforts in its cities. Their current deposit-return scheme incentivizes consumers to return PET bottles and cans through cash rebates. Today, Sweden has a recycling station every 300 meters away from a residential area[ix]. This has facilitated the collection of plastic bottles with a 100 percent coverage of households.
The Dutch government also launched two financial incentive programs: MIA, an environmental investment rebate, and VAMIL, a discretionary depreciation of environmental investments[x]. They are public schemes to grant tax advantages for environment-friendly products and entrepreneurs and to bring innovative products to the market more rapidly. The nation-wide circular economy program (2016) aims to realize a 50 percent reduction in the use of primary raw materials (minerals, fossil, and metals).
In the US, the Federal and State government has incentivized the domestic industry by exempting recycling companies from sales and property tax. The federal government offers a tax credit on the purchase and depreciation of recycling machinery. The IRS allows companies a tax allowance for depreciation of recycling and bio-fuel plant properties. States including Iowa, Louisiana, North Carolina, and Nevada, offer property tax exemptions for machinery and equipment used for recycling. While states like North Carolina, New Jersey, and Iowa, offer sales tax exemption on purchases of recycling equipment and machinery.
The Tax Cuts and Jobs Act, 2017, introduced tax reforms for the scrap recycling industry. It introduced a slew of measures including lowering the corporate tax rate, eliminating domestic production tax and introduced a 20 percent deduction for pass-through businesses (sole-proprietorship or Limited Liability Company) to help small businesses.
The recycling industry is a crucial enabler in our transition to a circular economy. Promotion of recycling and reuse is a necessary step for a nation to not only reduce the quantum of waste generated but also conserve its natural resources. The nature of the economic transition requires favorable government policies. The fiscal incentives counted above are the initiatives taken by the various government towards such a transition. However, the challenge for India is quite different than the countries counted above. The demands of the heightened inequalities in our economic and social system cannot be served by the policies of a developed country. We need more informed policies that recognize the importance of resource recovery, the capital and resource contribution of the recycling industry in India.
[i] CPCB Report, 2017. Link: http://www.indiaenvironmentportal.org.in/files/file/Generation%20of%20Waste.pdf
[ii] TERI, “Factsheet on plastic waste in India”, 2018. Link: https://www.teriin.org/sites/default/files/files/factsheet
[iii] Forbes,” Plastic Recycling: Could the Future Be in India”, 2018. Link
[iv] PlastIndia Foundation
[v] FICCI, “Use of Single-Use Plastic Needs To Be Minimized…”, Indian Express, 2019. Link
[vi] DownToEarth, Recycling of e-waste in India and its potential”, April 2019. Link
[vii] The NewsMinute, “India’s recycling industry is collapsing, ignoring it will land us in an urban nightmare”, 2017. Link
[viii] Indian Statistical Institute, Economic Research Unit, “Economics of Solid Waste Management: A Survey of Existing Literature”. Kolkata, 2003. Link: https://www.researchgate.net/publication/285232859
[ix] “From Trash to Treasure: Sweden’s Recycling Revolution”. Link
[x] European Commission, Country Report for Netherland, 2019. Link
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