The National Payments Corporation of India (NPCI) has addressed widespread concerns regarding the implementation of Goods and Services Tax (GST) on the Unified Payments Interface (UPI) Merchant Discount Rate (MDR). NPCI clarified that the new charges, effective October 15, will not affect the vast majority of small merchants or the overwhelming volume of digital transactions.
Understanding the New UPI MDR and GST Rules
From October 15, merchant payments (P2M) exceeding Rs 2,000 will be subject to an MDR of 0.4%, capped at a maximum of Rs 300. This fee is charged to the merchant for payment processing and settlement services. Additionally, certain categories like railways, telecom services, insurance, and fuel will benefit from a concessional flat MDR of Rs 5 for transactions above Rs 2,000.
Crucially, the 18% GST will be applied only to this MDR service fee, not to the total value of the UPI transaction itself. For example, a Rs 10,000 transaction with a 0.4% MDR would incur an MDR of Rs 40, and the GST would then be calculated on this Rs 40 fee, not on the full Rs 10,000 payment.
Who Remains Unaffected by the Changes?
NPCI emphasized that transactions up to Rs 2,000 will continue to have zero MDR, meaning no GST will be levied on them. Government data indicates that these smaller transactions constitute over 96% of the total UPI merchant transaction volume, ensuring most daily digital payments remain free of additional charges.
Furthermore, small merchants who receive up to Rs 1 lakh per month through UPI are also exempt from paying MDR. This provision ensures that micro and small businesses operating within this threshold will not be impacted by the GST on MDR.
Input Tax Credit for GST-Registered Merchants
For GST-registered merchants, the GST paid on MDR is not necessarily a permanent cost. Tax experts confirm that eligible businesses can claim input tax credit on the GST charged on MDR. This credit can then be used to offset their output GST liability, effectively neutralizing the cost for many businesses.
However, the ability to utilize this credit depends on the merchant's GST registration status and the nature of their business. Businesses dealing in exempt goods or services, for instance, may not be able to claim the credit and could therefore bear the GST cost on MDR.
Projected Revenue Impact
While the impact on individual small merchants and most transactions is limited, tax experts estimate that GST collections from MDR could generate several thousand crore rupees annually for the government. One projection suggests potential gross collections of approximately Rs 5,184 crore per year, based on reported monthly merchant payments above Rs 2,000 and a uniform 0.4% MDR.
NPCI reiterated that concerns about a broad additional burden on merchants are largely unfounded, given that the majority of UPI transactions and small businesses will continue to operate without incurring these new charges.