In a policy intervention aimed at strengthening India’s circular economy framework, NITI Aayog has recommended targeted GST relief and insurance-linked disincentives to accelerate the formal scrapping of end-of-life vehicles (ELVs). The recommendations, contained in a report on Enhancing Circular Economy of End-of-Life Vehicles in India, seek to address structural tax distortions and compliance asymmetries that currently disadvantage registered vehicle scrapping facilities (RVSFs).
From a tax-law perspective, the report is significant as it links GST rate design, reverse charge mechanisms, and insurance regulation to the broader objective of formalisation.
Regulatory Context: ELVs and the Push for Formalisation
India is witnessing a steady increase in ELVs on its roads, creating environmental, safety, and resource-efficiency concerns. In response, the Union Government has introduced multiple regulatory measures, including:
- mandatory fitness testing,
- standardised scrapping norms, and
- Extended Producer Responsibility (EPR) obligations.
However, despite these measures, a large share of vehicle scrapping continues to be handled by informal operators, largely due to cost advantages arising from tax non-compliance.
GST as a Structural Barrier for Registered Scrapping Facilities
Non-Uniform GST Rates Across the Value Chain
NITI Aayog has flagged that the GST framework applicable to ELV scrapping is fragmented, with different stages of the value chain attracting different rates. Historically:
- ELV procurement attracted 12-18% GST,
- sale of metal scrap attracted 18% GST, and
- resale of spare parts attracted 28% GST.
Even after GST 2.0 rate rationalisation effective September 22, 2025, ELV-related supplies continue to fall largely within 5% and 18% slabs, with most products gravitating toward the 18% rate.
This non-uniformity, the report notes, creates a cost disadvantage for RVSFs, especially when informal players face no comparable GST burden.
Call for GST Rate Reduction and Parity
The think tank has recommended that GST rates applicable to ELV procurement, scrap, and spare parts be reduced and rationalised, particularly for supplies routed through RVSFs. According to NITI Aayog:
- GST relief would promote parity between formal and informal sectors,
- lower rates would support formalisation and compliance, and
- financial viability of RVSFs would improve.
It has suggested that the Ministry of Road Transport and Highways formally place this proposal before the GST Council for consideration.
Reverse Charge Mechanism: Expanding Its Role
The report also draws attention to the reverse charge mechanism (RCM) introduced by the GST Council on supply of metal scrap from unregistered dealers to registered recyclers. Under RCM, the tax liability shifts from the supplier to the recipient, reducing tax leakage and improving compliance.
NITI Aayog has proposed extending RCM to ELV procurement itself, arguing that:
- it would prevent dual taxation on RVSFs,
- it would reduce cash-flow strain, and
- it would discourage informal sourcing outside the GST net.
From a GST design standpoint, this represents a targeted use of RCM to correct market distortions rather than merely ensure revenue collection.
Insurance as a Behavioural Lever for Vehicle Scrapping
Beyond GST, the report introduces an important insurance-linked policy lever. It recommends that motor insurance premiums should increase progressively with vehicle age, particularly beyond 15 years, to reflect higher accident risk.
This approach would:
- raise the cost of ownership of ageing vehicles,
- incentivise timely scrapping, and
- improve road safety outcomes.
The proposal aligns insurance pricing with risk-based regulation, indirectly supporting environmental and fiscal objectives.
Addressing Gaps: Total Loss Vehicles and Documentation
The report also highlights systemic gaps, including:
- absence of a structured pathway for Total Loss Vehicles to enter the ELV scrapping ecosystem, and
- continued road usage of vehicles lacking valid insurance or documentation.
It recommends stricter enforcement to ensure that only roadworthy and insured vehicles operate, while directing non-compliant vehicles to RVSFs.
Conclusion
NITI Aayog’s recommendations signal a shift from enforcement-centric regulation to incentive-based formalisation. By addressing GST rate distortions, expanding reverse charge coverage, and leveraging insurance economics, the proposed reforms aim to make the formal ELV scrapping ecosystem commercially viable and legally compliant.
For GST policymakers, the report underscores a critical lesson: tax neutrality and rate rationalisation are essential tools for driving compliance, especially in sectors dominated by informal activity. Whether the GST Council acts on these proposals will determine the pace at which India’s vehicle scrapping policy translates from regulation to reality.
Source: Business Standard