GST of 18% on UPI MDR can be claimed as input tax credit: Source

The MDR on UPI payments of more than Rs 2,000 comes into effect from October 15. The GST Council is set to meet on October 7.

While a Goods and Services Tax (GST) of 18% will apply on the Merchant Discount Rate (MDR) on UPI transactions of more than Rs 2,000, businesses registered under the indirect tax regime can claim the same as input tax credit, a senior finance ministry official said on Thursday.

The official, though, admitted that unregistered sellers who have an annual turnover of less than Rs 40 lakh but receive more than Rs 1 lakh every month as UPI payments – and therefore don’t qualify as ‘small merchants’ exempt from MDR – may end up paying GST on payments of more than Rs 2,000.

However, the official argued this would be a very small number of merchants and the matter can be “reasonably tackled by the GST Council”.

The Ministry of Finance’s Department of Revenue did not respond to a request asking for comment. GST comes under the revenue department.

The MDR on UPI payments of more than Rs 2,000 comes into effect from October 15. The GST Council is set to meet on October 7. The official did not say whether the matter will be discussed at the upcoming meeting.

Earlier this week, the National Payments Corporation of India (NPCI) announced a revised MDR framework for UPI payments to merchants of over Rs 2,000. While most of these will attract a charge of 0.4% capped at Rs 300, certain categories will face a flat merchant fee of Rs 5 and capital market transactions will face 0.02%.

A merchant facing an MDR of 0.4% on a UPI payment of Rs 10,000 will have to first pay a fee of Rs 40 and GST of Rs 7.2 on that Rs 40. For those where the MDR is a flat Rs 5, the GST will be 90 paise.

According to the aforementioned official, the majority of those who are under the GST registration threshold of Rs 40 lakh won’t have to pay MDR – and therefore, any GST on top of that – for multiple reasons. One, they may be receiving less than Rs 1 lakh per month as UPI payments. Two, they may not be receiving any payments via UPI which are for more than Rs 2,000, threshold above which an MDR is applicable.

“96% of P2M UPI transactions are under Rs 2,000. For small merchants with a turnover of below Rs 40 lakh, 99% of their UPI payments may be smaller than Rs 2,000,” the official said.

In most states, sellers of goods with an annual turnover of under Rs 40 lakh don’t have to register under GST. The threshold is Rs 20 lakh for service providers. Only those sellers who are registered under GST can claim input tax credit.

“There may be a small set of merchants who may face some GST impact. For that I would say that this decision has only been taken now and decisions related to GST are not taken by the government but the GST Council. When the Council thinks it’s right, it will discuss this issue,” the source said.

“Even if there is an issue, the GST Council will take a decision at an appropriate time. But it’s not a very big issue, it’s a very, very small issue… and can be reasonably tackled by the GST Council.”