UPI MDR may attract 18% GST, merchants to get input credit

Merchants would have to pay 18 per cent GST on the Merchant Discount Rate (MDR) charges for UPI payments above Rs 2,000, but can claim input tax credit (ITC), thereby easing the overall tax burden, tax experts said on Wednesday.

Effective October 15, UPI payments to merchants (P2M) above Rs 2,000 will attract a 0.4 per cent merchant discount rate with an overall cap of Rs 300. Besides, a flat concessional MDR rate of Rs 5 would be applicable on specific merchant categories such as railways, telecom services, insurance, and fuel for transaction above Rs 2,000.

The share of P2M UPI transactions above Rs 2,000 has steadily increased from 15.1 per cent in FY23 to 20.1 per cent in the June quarter of FY27, reflecting a sustained shift towards higher-value merchant payments on UPI.

Under the proposed framework, the MDR would be borne by the merchants as a charge for payment settlement services. Since the charge is to be borne by merchants for processing and settling digital payment transactions through the payment network, the 18 per cent GST on the service will be applicable on the merchants.

AMRG Global Managing Partner Rajat Mohan said the introduction of MDR on UPI transactions exceeding Rs 2,000 brings significant GST implications for India’s digital payment ecosystem.

Under the statutory framework, these payment settlement services will now attract an 18 per cent GST on the MDR billed to merchants. The proposed MDR charges could generate an estimated Rs 3,500-Rs 4,000 crore in annual GST collections, thus unlocking substantial revenue for the exchequer.

“However, the regulatory structure provides crucial relief: registered merchants absorbing these fees can claim Input Tax Credit (ITC) on the GST paid, heavily softening their overall tax burden,” Mohan said.

Nangia Global, Executive Director - Indirect Tax, Sivakumar Ramjee, said under this framework, GST will not touch the core transaction value; instead, 18 per cent GST will apply strictly to the 0.4 per cent merchant fee.

“For large, GST-registered enterprises, this tax creates minimal friction as it qualifies fully for Input Tax Credit, effectively neutralising the tax hit. Concurrently, strict exemptions for small vendors and transactions under Rs 2,000 completely insulate the grass-roots retail economy,” Ramjee said.

Ramjee said merchants with output tax liability in the Goods and Services Tax (GST) system will be able to claim ITC. But, those who are dealing with exempt goods and services under GST, for such merchants the GST burden on MDR charges will have to be borne by them.

According to Ramjee, at the current transaction volumes, where high-value P2M payments comprise a significant share of UPI’s financial value, this tax-on-MDR model is projected to generate over Rs 5,000 crore annually in fresh GST revenue for the exchequer.

This structural update strikes a calculated balance: it builds a lucrative revenue stream for the Government and funds payment infrastructure, all while preserving the zero-fee experience that drives India’s retail digital adoption, Ramjee added.

EY India Tax Partner Saurabh Agarwa said the 18 per cent GST will be leviable on MDR charges, which will be recovered by the banks from the merchant.

“However, where the bank provides the statement indicating such charges separately or a GST invoice, the same would be available as an input tax credit to the merchant which can be used to set off the output GST liability of the merchant,” Agarwal said.

AKM Global, Lead-Indirect Tax, Ikesh Nagpal, said the newly announced MDR would attract 18 per cent GST on the service charge, rather than on the underlying UPI payment amount, and would be available as ITC.

“Using the reported monthly value of Rs 6 lakh crore in merchant payments above Rs 2,000, a uniform 0.4 per cent MDR would imply gross GST of approximately Rs 432 crore a month, or Rs 5,184 crore annually. This is an indicative calculation before accounting for merchant exemptions, concessional charges and transaction caps. The Government’s net additional revenue would be lower, as eligible businesses could claim input tax credit on GST paid on MDR,” Nagpal said.