UPI MDR GST Clarification : The National Payments Corporation of India (NPCI) has clarified the questions and concerns raised regarding the implementation of GST on Merchant Discount Rate (MDR) for UPI transactions. According to NPCI, this decision will not impose any financial burden on small merchants using digital payments.
NPCI has rejected reports which claimed that levying GST on UPI MDR will make digital payments costlier for small businesses. This rule will apply only to merchant payments above ₹2,000, and GST registered merchants will be able to avail Input Tax Credit (ITC) on tax paid on MDR.
GST will be levied on the MDR and not on the total amount of the UPI transaction
From October 15, 0.4% MDR will be applicable on merchant payments (P2M) above ₹2,000, with a maximum limit of ₹300. While in other categories including railways, telecom services, insurance and fuel, a concessional MDR of ₹5 will be applicable on transactions above ₹2,000.
MDR is a charge for payment processing and settlement services, which is paid by large merchants. 18% GST will be levied on this service charge and not on the original UPI transaction amount.
Example: If a transaction of ₹10,000 takes place and an MDR of ₹40 at 0.4% is incurred, the 18% GST will be levied not on the ₹10,000 but only on the service charge of ₹40 (ie ₹7.20 will be GST).
Most UPI transactions outside the ambit of MDR
NPCI has clarified that transactions up to ₹2,000 will continue to have zero MDR and will not attract any GST. According to government statistics, more than 96% of the total volume of UPI merchant transactions are transactions of ₹2,000 or less.
Besides, small traders earning up to ₹1 lakh per month through UPI need not pay MDR. Traders falling within this limit will not have any impact of GST on MDR.
However, the share of high-value P2M transactions is increasing. Transactions above ₹2,000 accounted for 15.1% of total P2M volume in FY2023, rising to 20.1% in the June quarter of FY27.
The tax will be reimbursed through Input Tax Credit (ITC).
According to tax experts, GST registered traders can claim input tax credit (ITC) against GST paid on MDR and offset it against their output GST liability. However, businesses dealing in tax-free goods or services will not be able to avail this credit and may have to bear the cost of GST on MDR themselves.
Annual tax collection estimated at thousands of crores of rupees
According to experts’ estimates, the GST collection from MDR could reach thousands of crores of rupees annually. Based on monthly merchant payments of over ₹2,000 and an average MDR of 0.4%, the potential total collection could be around ₹5,184 crore annually.
In conclusion, NPCI has reiterated that since most of the small traders and daily transactions are out of this ambit, the concerns of additional financial burden on the traders are unfounded.