GST on UPI MDR Eligible for Tax Credit
GST-registered businesses can claim input tax credit on the 18% GST charged on UPI merchant discount rates, while a small section of unregistered merchants could face additional costs.
Businesses registered under the Goods and Services Tax regime will be able to claim input tax credit on the 18% GST charged on Merchant Discount Rate for eligible UPI transactions, according to a senior finance ministry official.
The revised MDR framework for merchant UPI payments above ₹2,000 is scheduled to take effect from October 15. Under the framework announced by the National Payments Corporation of India, most eligible transactions will attract an MDR of 0.4%, capped at ₹300.
Certain transaction categories will instead face a flat merchant fee of ₹5, while capital-market transactions will attract an MDR of 0.02%.
The 18% GST will be calculated only on the MDR charged to the merchant and not on the entire UPI transaction value. For example, a ₹10,000 UPI payment attracting a 0.4% MDR would result in a ₹40 merchant fee. GST on that fee would amount to ₹7.20.
GST-registered businesses can claim this GST amount as input tax credit, reducing the effective impact of the additional tax. However, unregistered merchants cannot claim input tax credit, potentially leaving a small group of businesses with an additional cost.
The issue could particularly affect merchants whose annual turnover remains below the GST registration threshold but whose monthly UPI receipts exceed the criteria used to classify small merchants for the MDR exemption.
According to the official, the number of merchants likely to face such an impact is expected to be limited. Around 96% of person-to-merchant UPI transactions are below ₹2,000, while the proportion could be as high as 99% among smaller merchants.
In most states, businesses selling goods generally do not need GST registration if their annual turnover is below ₹40 lakh, while the threshold for service providers is ₹20 lakh. Only GST-registered businesses are eligible to claim input tax credit.
The GST Council is scheduled to meet on October 7, ahead of the implementation of the revised UPI MDR framework. The official did not confirm whether the UPI-related GST issue would be taken up at the meeting, but indicated that any concerns affecting smaller merchants could be considered by the Council.