The government on Thursday said issues with GST on merchant discount rates (MDR) can be taken up by the GST Council. Meanwhile, the Central Board of Indirect Taxes & Custom (CBIC) has said that GST-registered merchant will be permitted full set-off of GST paid on MDR.
As MDR is a financial service, the GST rate is 18 per cent, and it must be paid to the bank. However, according to a senior official of the CBIC, this can be used for final tax dues. “GST on MDR charged by the bank from the merchant will be available as ITC to the merchant,” the official told businessline However, this will be available to regular GST assessee only.
This means that merchants who avail composite scheme and non-registered assessees will not be able to set off the GST paid. Still, there could be relief for them.
“If there is a problem, the GST Council could take a call as it is the final authority on GST issue,” a government official said. However, he was non-committal on whether the Financial Services Department will take up the proposal to the GST Council meeting scheduled on October 7.
Experts’ take
Meanwhile, experts said allowing merchants to claim ITC on the 18 per cent GST charged on the MDR significantly lowers their overall tax burden and keeps the effective transaction cost minimal for GST-registered businesses. “For organised B2B merchants, the impact is financially neutral. The 18 per cent GST levied on the 0.4 per cent MDR functions as a passing friction, because these entities seamlessly claim ITC to offset their output tax liabilities, keeping their credit value chains intact,” an tax expert said.
However, the problem is that the relief is not uniform. “Merchants who are fully GST-registered and able to utilise their credit smoothly will find this largely cost-neutral. But merchants who are unregistered will not get this relief at all. For them, that GST would sit as a straight addition to the MDR, making digital acceptance costlier. As more merchants formalise and register under GST, this relief naturally extends further, supporting the broader shift toward digital payment adoption,” another tax expert said.
Practical challenge
Also, big merchants have some doubts. According to another tax expert, the practical challenge could arise when multiple entities such as banks, payment aggregators, and NPCI are involved in the payment chain; NPCI may not have the merchant’s GSTIN, and the merchant does not receive a tax invoice from the entity actually charging the MDR. Any delay or mismatch in reporting could defer or disrupt the merchant’s ITC, effectively converting what is intended to be a creditable tax into a temporary or, in certain circumstances, a real cost.
“The invoicing architecture, identification of the actual supplier, timing of reporting and reconciliation mechanism will therefore need to be carefully calibrated if the GST on MDR is to remain credit-neutral for businesses,” he said.
Source from: https://www.thehindubusinessline.com/economy/gst-on-mdr-may-reach-gst-council/article71476779.ece
