The merchant discount rate (MDR) levied on select UPI payments will attract 18 percent goods and services tax (GST), two government sources told Moneycontrol.

“The GST will apply only to the MDR or fee that is actually charged on eligible UPI transactions,” one of the officials said. The sources also clarified that the GST paid on MDR could be claimed back completely through the input tax credit (ITC) route.

Starting October 15, person-to-merchant (P2M) UPI transactions above Rs 2,000 will attract an MDR of 0.4 percent.

MDR is a backend fee borne solely by the business, automatically deducted by the bank during transaction settlement.

An 18 percent GST will directly apply to the 0.4 percent MDR rather than the principal bill value.

For instance, a Rs 10,000 UPI transaction will incur a Rs 40 MDR plus an 18 percent GST of Rs 7.20 levied on the fee component. Consequently, the merchant’s total transaction cost will be Rs 47.20.

Merchants registered with GST will be able to claim the 18 percent GST component as input tax credit (ITC), sources said. ITC is available only to those merchants who supply the goods and services eligible for credit benefits.

“Similarly, where a flat fee of Rs 5 is applicable for specified transactions such as railway payments, the 18 percent GST will apply to that Rs 5 fee. In cases where the MDR is subject to a Rs 300 cap, the GST would apply to the applicable MDR amount, subject to the relevant rules,” the second source said.

“This is essentially a procedural aspect. The underlying exemption categories for UPI transactions remain as they are. The change is that wherever an MDR or fee is levied, GST will now apply to that charge.”

At present, MDR on credit and debit card transactions is subject to an 18 percent GST since the processing fee is categorised as a taxable service.

At present, MDR on credit and debit card transactions is subject to 18 percent GST as it is treated as a charge for the service provided. The same will now apply to MDR levied on eligible UPI transactions, sources said.

Government souces say, the GST structure on UPI MDR is similar to what already happens with credit and debit cards.

“There is an MDR on card transactions and 18% GST is paid on that MDR. The merchant is eligible to take input tax credit (ITC) of the GST paid on the MDR, subject to the normal conditions applicable for claiming credit.”

Another source said that the government is trying to explain that the GST on MDR is eligible for ITC. “However, there can be complications for businesses that have exempt (from GST) supplies because. In such cases, the tax could become a cost to that extent.”

Source: Money Control