As per government sources, there will be an 18% GST charged on the merchant discount rate (MDR) levied on select UPI payments. The GST will be applicable only on the MDR or fee that is actually levied on eligible UPI transactions. GST paid on MDR can be claimed via the ITC route.
From October 15, an MDR of 0.4% will be levied on person-to-merchant (P2M) UPI transactions exceeding ₹2,000. MDR is a backend fee borne solely by the business, and the bank automatically deducts it during transaction settlement.
An 18% GST shall be applicable to the 0.4% MDR and not on the principal bill value. For example, a Rs 10,000 UPI transaction will incur a Rs 40 MDR, including an 18 percent GST of Rs 7.20 levied on the fee component. Therefore, Rs 47.20 will be the merchant’s total transaction cost.
GST-registered merchants can claim an 18% GST component as ITC. The ITC facility is available only to traders who supply goods and services eligible for credit benefits. Likewise, 18% GST will apply to the flat fee of Rs 5 applicable to specified transactions like railway payments.
In cases where the ₹300 cap on MDR applies, GST will be levied on the applicable MDR amount in accordance with the relevant rules. It is a procedural aspect. The existing categories of exemptions for UPI transactions will remain unchanged.
The change is that wherever MDR or fees are applicable, GST will now also be levied on that charge. Currently, an 18% GST is levied on the MDR for credit and debit card transactions, as processing fees fall under the category of taxable services.
Currently, an 18% GST is levied on the MDR for credit and debit card transactions, as it is considered a charge for services rendered. According to sources, this same rule will now also apply to the MDR charged on eligible UPI transactions. Government sources state that the GST structure for UPI MDR is the same as that already applicable to credit and debit cards.
Card transactions attract MDR, and 18% GST is payable on that MDR. Merchants are eligible to claim GST Input Tax Credit (ITC) on the GST paid on MDR, subject to the general conditions applicable for claiming credit.
The Government explains that the GST on MDR is eligible for ITC. However, businesses whose supplies are exempt from GST may face difficulties. In such cases, the tax can effectively become a cost.
