Government sources said the GST paid on MDR can be set off against Input Tax Credit (ITC).
Amid concerns that merchants would have to bear an 18 per cent Goods and Services Tax (GST) on Merchant Discount Rate (MDR) charges for UPI payments above Rs 2,000, government sources have termed the claim a “false rumour”, saying the GST paid on MDR can be set off against Input Tax Credit (ITC).
The sources said the government does not expect the introduction of MDR to result in a significant increase in cash transactions or a decline in UPI payments after the new charges come into effect on October 15.
“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. 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,” sources said.
Under the new framework, UPI payments made to merchants (P2M) above Rs 2,000 will attract a 0.4 per cent MDR from October 15, subject to an overall cap of Rs 300 per transaction.
A flat concessional MDR of Rs 5 will apply to certain merchant categories, including railways, telecom services, insurance and fuel, for transactions above Rs 2,000.
The government is also working to plug gaps in enforcement and has held discussions with payment aggregators. Sources said the implementation will be closely monitored to ensure that merchants do not pass on the MDR to consumers.
What Tax Experts Said?
Tax experts, however, pointed out that the 18 per cent GST would apply to the MDR charged to merchants and not to the underlying UPI transaction value. They said eligible GST-registered businesses would generally be able to claim ITC on the GST paid on MDR, subject to applicable conditions.
AMRG Global Managing Partner Rajat Mohan said the introduction of MDR on UPI transactions above Rs 2,000 would have significant 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 could generate around Rs 3,500-4,000 crore in annual GST collections for the government.
“However, the regulatory structure provides crucial relief: registered merchants absorbing these fees can claim Input Tax Credit (ITC) on the GST paid, heavily softening their overall tax burden,” Mohan said.
Nangia Global Executive Director – Indirect Tax Sivakumar Ramjee said the GST would not be imposed on the entire UPI transaction value. Instead, the 18 per cent tax would apply only to the 0.4 per cent MDR.
