The Indian government has unequivocally rejected recent rumors suggesting the imposition of a separate Goods and Services Tax (GST) on Unified Payments Interface (UPI) transactions. Officials clarified that while GST will apply to the Merchant Discount Rate (MDR) charged on specific UPI transactions, this does not constitute a direct tax on UPI payments themselves.
Input Tax Credit for Businesses
According to government sources, businesses that incur MDR on eligible UPI transactions will be able to claim input tax credit on the GST component. This mechanism allows them to set off their tax liability against other eligible input credits, effectively preventing a new, additional tax burden.
“GST on UPI is a false rumour. It will be set off in Input tax credit,” government sources stated, adding that any implementation issues would be reviewed by the GST Council.
Understanding the New MDR Framework
The clarification comes amidst discussions surrounding the new MDR framework, which is set to take effect from October 15. This framework will apply to person-to-merchant (P2M) UPI transactions exceeding ₹2,000. Such transactions will incur an MDR of 0.4%, with an overall cap of ₹300.
The government emphasized that MDR is a fee associated with processing digital payments, distributed among participants in the payment ecosystem, and should not be confused with a tax collected by the central government.
Consultations and Implementation Focus
Officials confirmed that the introduction of MDR followed extensive consultations with various stakeholders, including regulators, stock exchanges, and payment aggregators. The government's current focus is on the smooth implementation and enforcement of the new system, including efforts to address any potential gaps and ensure merchants do not pass additional costs onto consumers.
No Expected Shift Back to Cash
Addressing concerns that the new MDR could prompt a return to cash transactions, government sources expressed confidence that no significant shift away from digital payments is anticipated. They stated, “We don't see much increase in cash transactions due to MDR. We are confident that there will be no increase in cash transactions. Don't expect UPI transactions to fall after the rollout on 15th October.”
Exemptions to the MDR Levy
- Payments up to ₹2,000 will remain exempt from the MDR.
- Recurring UPI payments, such as utility bills, OTT subscriptions, and mutual fund installments, will not attract the 0.4% MDR simply because their transaction value exceeds ₹2,000.
- Small merchants classified under the P2PM (person-to-person-to-merchant) category, who receive up to ₹1 lakh per month through UPI QR codes, will also remain outside the scope of the MDR.
The government's stance on GST aims to provide clarity amid ongoing political opposition to the MDR framework, with some leaders questioning both the policy and its introduction process.