Agencies | New Delhi:
Amid concerns that merchants would have to bear an additional 18 per cent Goods and Services Tax (GST) on Merchant Discount Rate (MDR) charges for high-value UPI payments, government sources have described the claim as a “false rumour”, saying the GST paid on MDR can be offset through Input Tax Credit (ITC).
The clarification comes ahead of the implementation of the new MDR framework from October 15, under which certain merchant-facing UPI transactions above ₹2,000 will attract a charge.
“GST on UPI is a false rumour. It will be set off in Input Tax Credit. If there will be any issue, then that will be looked into by the GST Council,” government sources said.
The sources also said the government does not expect the introduction of MDR to lead to a significant increase in cash transactions or a decline in UPI usage.
“We don’t see much increase in cash transactions due to MDR. We are confident that there will be no increase in cash transactions. Don’t expect UPI transactions to fall after the rollout on October 15,” they said.
Under the new framework, merchant-to-merchant? [Correction: merchant-to-person/business-facing P2M] UPI transactions above ₹2,000 will attract an MDR of 0.4 per cent, subject to an overall cap of ₹300 per transaction.
A concessional flat MDR of ₹5 will apply to certain merchant categories, including railways, telecom services, insurance and fuel, for transactions above ₹2,000.
The government is also working with payment aggregators to address enforcement-related gaps. Officials said implementation would be closely monitored to ensure that merchants do not pass the MDR charges on to consumers.
Tax experts have clarified that the 18 per cent GST would apply to the MDR charged to merchants, and not to the entire underlying UPI transaction value.
Eligible GST-registered businesses would generally be able to claim ITC on the GST paid on MDR, subject to applicable conditions.
Rajat Mohan, Managing Partner at AMRG Global, said the introduction of MDR on UPI transactions above ₹2,000 would have GST implications for the digital payments ecosystem.
“Under the statutory framework, these payment settlement services will now attract an 18 per cent GST on the MDR billed to merchants,” Mohan said.
He estimated that the MDR regime could generate around ₹3,500–4,000 crore in annual GST collections for the government.
However, he said registered merchants absorbing the charges could claim ITC on the GST paid, thereby reducing the effective tax burden where the credit is eligible.
Sivakumar Ramjee, Executive Director – Indirect Tax at Nangia Global, also stressed that GST would not be imposed on the entire value of a UPI payment.
Instead, the 18 per cent GST would apply only to the 0.4 per cent MDR charged on eligible transactions.
“For large, GST-registered enterprises, this tax creates minimal friction as it qualifies fully for Input Tax Credit, effectively neutralising the tax hit,” Ramjee said.
He added that exemptions for small vendors and transactions below ₹2,000 would shield a significant portion of small-value retail transactions from the MDR framework.
However, Ramjee pointed out that the impact could vary for businesses that do not have an output GST liability.
“Merchants with output tax liability in the GST system will be able to claim ITC. But those who are dealing with exempt goods and services under GST, for such merchants the GST burden on MDR charges will have to be borne by them,” he said.
Ramjee estimated that the tax-on-MDR framework could generate more than ₹5,000 crore annually in additional GST revenue, based on current transaction volumes and the share of high-value P2M payments.
Saurabh Agarwal, Tax Partner at EY India, said the 18 per cent GST would be levied on the MDR charges recovered by banks from merchants.
However, he said merchants could claim the tax as ITC where the charges are separately reflected in a statement or supported by a GST invoice.
“The same would be available as an input tax credit to the merchant which can be used to set off the output GST liability of the merchant,” Agarwal said.
The distinction between GST on the MDR component and GST on the entire UPI transaction value is therefore central to the current debate.
While eligible GST-registered businesses may offset the tax through ITC, the actual impact could vary depending on a merchant’s GST status and whether its supplies are taxable or exempt.
With the new MDR regime scheduled to take effect from October 15, the government has indicated that implementation will be closely monitored, particularly to ensure that the charges do not result in additional costs being passed on to consumers or materially affect the adoption of digital payments.
