Summary: The article discusses concerns regarding GST enforcement practices affecting scrap dealers, stating that enforcement increasingly relies on data analytics, automated risk flags and retrospective actions. It notes that, compared with the earlier Sales Tax and VAT regimes, GST administration has seen increased issuance of show cause notices, retrospective cancellation of registrations under Section 29 of the CGST Act and routine invocation of Section 74 based on analytics-generated reports. According to the article, many notices and cancellation orders contain general allegations, resulting in substantial tax demands, while genuine buyers may face scrutiny or denial of input tax credit after retrospective cancellation of suppliers’ registrations. The article states that courts have provided relief in several cases and clarified legal principles, but asserts that reliance on analytics, retrospective cancellations and frequent invocation of Section 74 continue. It advocates a balanced approach, suggesting that retrospective cancellation be used only in genuine cases with proper reasoning, Section 74 be invoked where there is clear evidence of fraud or intentional evasion, analytics serve as a starting point for inquiry rather than conclusive proof, and greater emphasis be placed on field-based verification, independent application of mind and uniform enforcement across sectors.
Scrap Dealers, Data Analytics and Retrospective GST: An Unresolved Crisis in Enforcement
Nine years after the introduction of the Goods and Services Tax, India’s indirect tax system stands at a critical crossroads. Conceived as a transparent, technology‑driven reform to unify the tax structure and improve compliance, GST has undoubtedly transformed tax administration. However, alongside these advancements, a troubling enforcement pattern has emerged—one that increasingly relies on data analytics, automated risk flags, and target‑driven actions, often at the cost of legal principles and practical realities.
Among all sectors, the scrap trade has become the most visible and, arguably, the most affected casualty of this evolving enforcement model.
The scrap business is not a new or unfamiliar segment of the Indian economy. It has existed for decades, long before the introduction of GST, and operated under earlier regimes such as Sales Tax and Value Added Tax. Even under VAT, input tax set‑off mechanisms were available, and while there were instances of non‑compliance or irregularities, the administration did not resort to widespread retrospective cancellation of registrations or the creation of massive fraud‑based demands. Enforcement was more balanced, field‑oriented, and grounded in verification.
In contrast, under GST, the approach toward scrap dealers has taken a significantly harsher and more mechanical turn.
Across Karnataka and several other States, it is increasingly observed that both enforcement wings and jurisdictional officers are focusing disproportionately on scrap dealers. Based on analytics‑generated reports, officers are issuing bulk show cause notices, suspending registrations, and passing cancellation orders with retrospective effect—sometimes covering multiple financial years. Simultaneously, there are directions to invoke Section 74 in a routine manner, alleging fraud, suppression, or wilful misstatement, often without adequate supporting material.
This pattern raises serious concerns about both legality and administrative prudence.
Under Section 29 of the CGST Act, cancellation of registration, particularly with retrospective effect, is not an automatic or mechanical exercise. It requires the proper officer to form an independent and reasoned satisfaction based on specific statutory grounds. The taxpayer must be given a proper opportunity of being heard, and the order must clearly reflect application of mind.
Similarly, Section 74 is a stringent provision intended for cases involving deliberate fraud or intent to evade tax. It cannot be invoked merely because a mismatch appears in the system or because a supplier is later found to be non‑compliant. The law requires tangible evidence of wrongdoing—not assumptions based on algorithmic outputs.
However, the ground reality presents a different picture.
Today, many officers spend the majority of their time sitting in offices, working on computers, comparing return data, e‑way bills, and analytics dashboards. Instead of conducting field verification or examining books of accounts in a practical context, decisions are increasingly driven by system‑generated alerts. In many cases, show cause notices contain generalized allegations without specific evidence, and cancellation orders merely repeat these allegations without independent reasoning.
This shift from “evidence‑based enforcement” to “analytics‑based enforcement” has significant consequences.
One of the most serious outcomes is the creation of huge, unrealistic tax demands—what may rightly be described as fictitious liabilities. Scrap dealers, by and large, belong to economically weaker sections. Many operate with limited capital, without immovable property, and with minimal financial documentation. When their registrations are cancelled retrospectively and demands running into crores are raised under Section 74, these amounts exist only on paper. In reality, the Government is unable to recover them.
This leads to a paradox: high demand figures but low actual revenue collection.
At the same time, the damage to the sector is severe. Small dealers are pushed out of the formal system, and scrap trading gradually shifts back into the informal economy. This defeats the very objective of GST—to bring transparency and widen the tax base.
Another critical issue is the treatment of bona fide buyers.
In many instances, genuine purchasers who have paid tax, received goods, and maintained proper documentation are being questioned or denied input tax credit solely because their supplier’s registration has been cancelled retrospectively. This approach is not supported by law. Judicial pronouncements have consistently held that ITC cannot be denied to a bona fide buyer without establishing their involvement in fraud or collusion.
Punishing compliant buyers for the alleged default of suppliers undermines business confidence and disrupts legitimate trade.
Equally concerning is the imbalance in sectoral focus.
While the scrap sector is subjected to intense scrutiny, many other sectors with comparable or even higher risk profiles do not appear to receive the same level of enforcement attention. There is a perception—widely shared among practitioners—that both adjudication and enforcement machinery are not being deployed evenly across sectors. Instead, resources are concentrated on segments like scrap, where small taxpayers are easier to identify and proceed against.
This selective enforcement is not only unjustified but also administratively inefficient.
The GST department is equipped with highly knowledgeable and experienced officers, capable of conducting nuanced investigations and making reasoned decisions. However, excessive dependence on analytics tools and top‑down targets has limited their ability to exercise independent judgement. Officers are often compelled to act on system outputs rather than their own professional assessment.
This is not a healthy development for any tax administration.
Technology should assist decision‑making, not replace it. Analytics can be a useful tool for identifying risk, but it cannot be the sole basis for legal action. Data in GST systems is still evolving, and discrepancies are common due to technical errors, timing differences, and reporting issues. Acting on such data without proper verification leads to incorrect conclusions and unnecessary litigation.
Moreover, the current approach imposes a significant administrative burden.
Time, manpower, and resources are spent on generating notices, passing orders, and conducting proceedings that ultimately result in demands which cannot be recovered. This represents a loss not only to taxpayers but also to the Government in terms of administrative efficiency.
There is also a human dimension that cannot be ignored.
Scrap dealers often represent the lowest tier of the formal economy. Many are first‑generation entrepreneurs, operating in difficult conditions. Aggressive enforcement without adequate understanding of their business realities can destroy livelihoods and create economic instability at the grassroots level.
From a broader perspective, the scrap industry plays a vital role in the circular economy. It supports recycling, reduces waste, and supplies raw material to manufacturing sectors. Disrupting this sector through excessive and disproportionate enforcement has wider economic implications.
The question that arises, therefore, is whether this issue has been resolved.
The answer, unfortunately, is no.
While courts have provided relief in several cases and clarified important legal principles, there has been no systemic correction in enforcement practices. The reliance on analytics continues, retrospective cancellations are still being issued, and Section 74 is frequently invoked without adequate basis.
What is required is a balanced and legally sound approach.
First, retrospective cancellation should be used sparingly and only in genuine cases, with proper reasoning and consideration of its impact on all stakeholders. Second, Section 74 should be invoked strictly in cases where there is clear evidence of fraud or intentional evasion. Third, analytics should be treated as a starting point for inquiry—not as conclusive proof.
Most importantly, there must be a shift back to field‑based verification and application of mind.
The department must utilise its manpower effectively, ensuring that officers engage with taxpayers, understand business models, and make informed decisions. Uniform enforcement across sectors is essential to maintain fairness and credibility.
In conclusion, the current enforcement pattern—particularly in relation to scrap dealers—raises serious concerns about legality, efficiency, and economic impact. It creates large, unrecoverable demands, disrupts genuine business activity, and places undue pressure on a vulnerable segment of the economy.
In my considered view, this approach is neither sustainable nor justified. The GST administration must move away from excessive dependence on analytics and return to a more balanced system that combines technology with human judgement, legal discipline, and economic understanding. Only then can the true objectives of GST be achieved,
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