VAT and EPR Regulations: A Marriage Made in Fiscal Hell ?
Extended Producer Responsibility (EPR) schemes, designed to make manufacturers shoulder the burden of managing their products' post-consumer fate, are increasingly seen as a vital tool in the fight against the global waste crisis. Yet, in many emerging economies, an unlikely antagonist is undermining their effectiveness: Value Added Tax (VAT). This seemingly innocuous consumption tax is creating perverse incentives, distorting waste supply chains, and, ironically, hindering the very recycling and recovery that EPR aims to promote. The result is an unhappy marriage, where the noble intentions of environmental policy are being strangled by the fiscal realities of VAT.
Decision Point 19: VAT or no VAT on the collected recyclables sold to recyclers and end destination?
The fundamental tension arises from the way VAT interacts with the flow of materials in the waste recovery process. Governments, understandably keen to collect revenue, often levy VAT at multiple stages. Recyclers, cement factories burning waste as fuel, and exporters of valuable scrap are typically formal entities within the tax system. When they purchase waste materials, even those destined for recycling, VAT often applies. However, the very nature of waste collection, particularly in developing nations, complicates this picture.
A significant portion – often 60-80% in emerging markets – of recyclable materials is gathered by a vast army of informal waste pickers. These individuals, the unsung heroes of resource recovery, manually sort waste at its source, extracting valuable plastics, metals, and paper. In Indonesia and Brazil, their numbers exceed a million; in India, they are estimated at a staggering six million – roughly one collector for every 250 citizens. Their crucial role lies in their ability to efficiently sort waste at the point of generation, preventing valuable recyclables from being contaminated by food waste and other refuse in municipal garbage trucks.
The VAT problem arises because these informal collectors operate outside the formal tax system. They cannot issue VAT invoices to the intermediaries or aggregators who buy from them. This lack of a VAT receipt then has a cascading effect. When these aggregators sell to recyclers or other formal processors, they struggle to claim back the VAT they are supposed to charge, as they have no VAT-inclusive invoices from their informal suppliers. This leaves them in a precarious position, caught between the formal tax obligations and the informal realities of the collection network.
The consequence is a distortion of EPR funding. EPR schemes typically operate by levying fees on consumer goods companies. These funds are intended to subsidise the collection and processing of the waste their products generate. However, EPR regulations often require proof of purchase or sale, usually in the form of an invoice, to disburse these subsidies. Since informal collectors cannot provide VAT invoices, they are effectively excluded from accessing these crucial funds. The EPR money, therefore, tends to flow primarily to the large, formal recycling companies at the end of the chain, who can readily produce VAT-compliant documentation.
This VAT-driven bias has several detrimental effects. Firstly, it disadvantages the very actors – the informal collectors – who are often the most efficient at the critical first step of sorting and recovering valuable materials. Secondly, it inadvertently benefits private collection companies, often operating with resource-intensive garbage trucks and compactors. While appearing ‘professional’, these methods can mix and contaminate valuable recyclables with general waste, rendering them less suitable for high-quality recycling. The EPR subsidies, meant to encourage recovery, can ironically incentivise collection methods that undermine it.
The absurdity of the situation is that governments are, in essence, taxing the same waste twice: once during its initial collection (embedded in the prices paid by formal buyers) and again in its recycled form. This ‘VAT discrimination’ against informal collectors not only deprives them of much-needed income but also undermines the efficiency and effectiveness of EPR schemes in emerging markets, where their contribution to recycling is paramount.
The solution lies in decoupling EPR subsidies from VAT requirements, at least for the collection phase of the waste supply chain. Instead of relying on VAT invoices, EPR payments to collectors could be based on traceable transactions verified through alternative means, such as mobile phone One Time Password (OTP) confirmations or even biometric identification. The focus should shift from enforcing VAT compliance within the informal sector to incentivising the crucial work of waste recovery, regardless of the collector's formal status.
A more enlightened approach would recognise the vital role of informal collectors in achieving EPR goals. Policies should be designed to support and integrate them into the formal waste management system, providing them with access to EPR funds based on the quantity and quality of materials they recover, rather than their ability to navigate complex VAT regulations. Abolishing VAT requirements for EPR subsidies in the collection sector would level the playing field, empower these essential workers, and ensure that EPR funds truly trickle down to where they are most needed – at the very beginning of the recycling journey. Only by untangling this unhappy marriage between VAT and EPR can we unlock the full potential of producer responsibility and foster a more just and effective circular economy.