The GST Council meeting on October 7 is likely to discuss ways to provide relief from GST on the merchant discount rate (MDR) charged on some high-value UPI transactions, particularly for small merchants not registered under GST, government sources told Moneycontrol.
Under GST rules, businesses with annual turnover less than Rs 40 lakh for goods or Rs 20 lakh for services generally do not have to register. As unregistered businesses, they cannot claim input tax credit (ITC). So when GST is charged on MDR on UPI transactions, small businesses cannot offset the additional tax cost.
Starting October 15, person-to-merchant (P2M) UPI transactions above Rs 2,000 will attract a 0.4 percent MDR, with 18 percent GST charged on the MDR rather than the transaction value. The MDR is borne entirely by the merchant and deducted by the bank when the transaction is settled.
Last week, a senior government official told Moneycontrol that companies can claim back the GST paid on MDR through the ITC route, provided they are registered with the tax authorities and supply goods and services that are not exempt from GST.
“Many small merchants are not registered with the authorities. They may be ineligible for the ITC benefit,” a government official said. The person added that the Council may discuss a mechanism through which such businesses are not “drastically affected”.
Why is relief needed?
Tax experts note that GST charged on UPI MDR cannot have a one-size-fits-all approach. For a GST-registered business, the 18 percent GST on MDR would generally be available as ITC, subject to the usual conditions (not making exempt supplies), so it may not become a final cost. But for an unregistered merchant, there is no mechanism to claim ITC, which means the same GST becomes a direct business cost, they say.
Tax experts say the GST on UPI MDR will affect merchants differently. For GST-registered businesses, the GST on MDR would generally be available as ITC, and may not become a final cost. But unregistered merchants cannot claim the tax credit.
“A merchant may not be required to register under GST but could still be covered by the MDR framework and end up bearing GST on the MDR without any mechanism to recover it. That is where the Council’s approach will matter,” an tax expert said. “The framework should remain simple, with an easy and practical invoicing mechanism, particularly because the benefit of ITC could also be lost if the requisite invoice is not received or available to the merchant,” he added.
“Need a valuation methodology for tax”
Tax experts say the Council should also discuss how the taxable amount can be identified. “The GST Council may consider clarifying whether GST is to be levied only on the actual MDR charged, and on it will be imposed on a flat MDR structure,” another tax expert said.
Certain UPI transactions above Rs 2,000, such as purchases linked to railways, agriculture, and education, will attract a flat Rs 5 MDR and not the 0.4 percent levy.
“The authorities should clearly identify the taxable supply, the person liable to tax, and confirm that GST is computed on the actual MDR. It should also be clarified whether the notified MDR is inclusive or exclusive of GST,” he added. In the GST laws, any transaction that is not legally exempt from GST levy is a “taxable supply”.
A clarification by the GST Council on how MDR will be taxed would help prevent valuation, invoicing and cascading-credit disputes as the new MDR framework is implemented, experts said.
