UPI MDR GST: NPCI says small merchants and 96% of transactions remain unaffected from October 15

The National Payments Corporation of India (NPCI) has sought to clarify concerns around the proposed Goods and Services Tax (GST) on the Merchant Discount Rate (MDR) for certain UPI transactions, saying the move will not affect the overwhelming majority of digital payments or small merchants.

NPCI said reports suggesting that GST on UPI MDR would make digital payments costlier for small businesses were incorrect. The impact will be limited to merchant payments above Rs 2,000, while eligible GST-registered merchants can claim input tax credit on the tax paid on MDR.

GST applies to MDR, not the UPI transaction

From October 15, merchant payments (P2M) above Rs 2,000 will attract an MDR of 0.4%, subject to an overall cap of Rs 300. A concessional flat MDR of Rs 5 will apply to transactions above Rs 2,000 in specified categories, including railways, telecom services, insurance and fuel.

MDR is a fee charged for payment processing and settlement services and is borne by the merchant. The 18% GST will be imposed on this service fee, rather than on the value of the UPI transaction itself.

For example, on a Rs 10,000 transaction attracting 0.4% MDR, the MDR would be Rs 40. GST at 18% would then apply to the Rs 40 service fee, rather than the full Rs 10,000 payment.

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Most UPI transactions remain outside MDR

NPCI said transactions of up to Rs 2,000 will continue to have zero MDR and, consequently, will not attract GST on MDR. Government data indicates that such transactions account for more than 96% of UPI merchant transaction volume.

Merchants receiving up to Rs 1 lakh a month through UPI are also not liable to pay MDR, according to NPCI. This means small merchants falling within this threshold would not face the issue of GST on MDR.

However, the share of higher-value P2M transactions has been increasing. According to the background information provided, transactions above Rs 2,000 accounted for 15.1% of P2M transaction volume in FY23, rising to 20.1% in the June quarter of FY27.

GST cost can be offset through input tax credit

Tax experts said the GST paid on MDR need not become a permanent cost for merchants that have an output GST liability.

A GST-registered merchant can claim input tax credit on the GST charged on MDR and use it to offset its output GST liability. The tax applies to the payment service fee, not to the underlying sale.

However, the benefit depends on the merchant's tax status and the nature of its business. Businesses dealing in exempt goods or services may not be able to utilise the credit and could therefore bear the GST cost on MDR.

Revenue impact could run into thousands of crores

Tax experts cited in the background material estimated that GST collections from MDR could run into several thousand crore rupees annually. One estimate put potential gross collections at around Rs 5,184 crore a year, based on reported monthly merchant payments above Rs 2,000 and a uniform 0.4% MDR.

The actual net revenue would depend on exemptions, concessional MDR rates, transaction caps and the input tax credits claimed by eligible businesses.

NPCI said, therefore, that concerns about GST on MDR imposing a broad additional burden on merchants are misplaced, with most UPI transactions and small merchants remaining unaffected.