The GST Council will take a call on whether the merchant fee proposed on UPI payments above Rs 2,000 should attract 18 per cent GST, government sources said Thursday, bringing the tax treatment of the new charge into focus ahead of its introduction next month. Under the new framework taking effect from October 15, merchant payments above Rs 2,000 will attract a merchant discount rate (MDR) of 0.4 per cent, subject to a maximum charge of Rs 300.
The MDR will be borne by merchants as a charge for processing and settling payments through the digital payment network and not directly by consumers making UPI payments. Since payment processing and settlement constitute a service under the GST framework, the merchant fee would ordinarily attract GST at 18 per cent, though the final position is expected to be considered by the Council.
Council may review GST
Government sources said the question of GST on the merchant fee would be placed before the GST Council, which is chaired by the Union Finance Minister and includes representatives of states. The next meeting of the Council is scheduled for October 7, little more than a week before the MDR framework is due to take effect.
“We are hopeful that the GST Council will take a view on the 18 per cent GST on merchant fee on UPI transactions in the larger interest of consumers as was done in case of insurance premium,” sources said. The statement indicates that the government expects the Council to examine whether the normal tax treatment of the payment-processing service should continue once MDR is introduced.
Sources, however, indicated that the broader focus of the October 7 meeting would be on simplifying GST procedures rather than making changes to tax rates. The treatment of GST on UPI merchant fees is nevertheless expected to come before the Council because the MDR represents payment for a service and therefore falls within the indirect tax framework.
How the new MDR will work
From October 15, UPI person-to-merchant transactions exceeding Rs 2,000 will attract MDR at 0.4 per cent, with the amount capped at Rs 300. This means the merchant, rather than the person making the UPI payment, will bear the payment-processing charge under the framework.
At 0.4 per cent, a merchant receiving a UPI payment of Rs 5,000 would face an MDR of Rs 20 before applicable GST, while a Rs 10,000 transaction would attract an MDR of Rs 40. The Rs 300 ceiling means the charge would stop increasing once the transaction value reaches the level at which the 0.4 per cent calculation hits the cap.
The proposed MDR does not amount to a direct charge on consumers for making UPI payments. Its immediate incidence is on merchants accepting eligible UPI transactions, although the debate over such charges has also focused on whether businesses could eventually factor payment-processing costs into their pricing.
Merchants can claim tax credit
If the existing GST treatment is retained, the 18 per cent levy would apply to the MDR charged for processing the transaction rather than to the entire value of the UPI payment. A merchant charged an MDR of Rs 40, for instance, would face GST of Rs 7.20 on that fee, not 18 per cent tax on the Rs 10,000 transaction itself.
Tax experts have pointed out that eligible businesses would be able to claim Input Tax Credit on the GST paid on MDR, subject to the normal conditions governing such credit. This could reduce the effective tax burden for businesses that are able to utilise the credit against their GST liabilities.
The October 7 GST Council meeting will therefore be closely watched for clarity on whether the merchant fee will remain subject to the standard 18 per cent tax on services or receive different treatment before the MDR regime takes effect. The decision will determine the final cost that merchants face when accepting UPI payments above the Rs 2,000 threshold.