Who will have to pay GST on UPI transactions?:Will 18% GST apply to the full amount or just MDR? Know the details

A new merchant discount rate (MDR) is set to apply to high-value UPI transactions from 15 October. Following the government’s move, shopkeepers and business owners have raised several questions about the fee and the GST charged on it.
Questions include: Will this affect customers’ pockets? What will happen to small shopkeepers, and how will GST be calculated? Read this article for answers to all these questions and more… Question: What changes are going to be made to the rules for UPI payments from 15 October? Answer: From 15 October, the merchant discount rate (MDR) will apply to selected UPI transactions above ₹2,000. However, only merchants will have to pay this charge. In most cases, the MDR has been set at 0.4%, with a maximum cap of ₹300 per transaction. For some specific sectors, it will be a flat ₹5, while it will be 0.02% for capital market transactions. Question: Will ordinary customers have to pay any charge when making payments through UPI? Answer: No, customers will not have to pay any charge. Person-to-person (P2P) payments between individuals will remain completely free, as before. In addition, no charge will be levied on UPI payments of up to ₹2,000 made to any shop or merchant. According to the government, around 96% of person-to-merchant (P2M) transactions will not be affected. Question: Will 18% GST be levied on ₹2,000 or on the entire UPI transaction amount? Answer: No, 18% GST will not be levied on the entire UPI payment amount. It will apply only to the service fee charged as MDR. For example, if a customer makes a payment of ₹10,000 to a merchant and the MDR is 0.4%, or ₹40, 18% GST will be levied only on this ₹40, which amounts to ₹7.20. Thus, the merchant will have to pay a total processing charge of ₹47.20. Question: If MDR is charged at a flat rate of ₹5, how much GST will be levied? Answer: For transactions where MDR is fixed at a flat ₹5, the tax at 18% GST will be 90 paise. In such cases, the merchant will have to pay a total of ₹5.90, including MDR and GST. Question: Can merchants claim input tax credit on this GST? Answer: Yes, businesses registered under GST can claim input tax credit (ITC) on the GST paid on MDR, subject to the applicable terms and conditions. According to experts, for registered businesses, this GST will not be a permanent or additional cost. However, for businesses that are not registered under GST, it will become an extra cost. Question: What impact will this have on small shopkeepers and businesses? Answer: Most small traders will not be significantly affected. Under the zero-MDR framework, MDR will remain zero for small traders who receive up to ₹1 lakh in payments per month through a UPI QR code. According to the Ministry of Finance, UPI transactions of 99% of traders with an annual turnover of less than ₹40 lakh are either below ₹2,000 or fall within the monthly exemption limit of ₹1 lakh. Question: Can MDR be imposed on any trader with a turnover of less than ₹40 lakh? Answer: Yes, some such cases may arise. Even if an unregistered merchant’s annual turnover is below ₹40 lakh, if they receive more than ₹1 lakh in UPI payments in a month, they will not be eligible for the small merchant exemption. In such a situation, they will have to pay MDR and GST on payments above ₹2,000. Officials say that the number of such merchants is extremely small, and the issue may also be raised before the GST Council. Question: Can shops or merchants recover the MDR charge from customers? Answer: Absolutely not. The government has clearly directed that merchants cannot pass on this MDR charge to customers. Banks and payment providers have been strictly instructed to ensure that merchants do not levy any separate additional charge on customers. Question: How should companies and shopkeepers record this in their accounts? Answer: Experts advise businesses to maintain four separate records when accounting for their UPI payments… In addition, banks’ settlement reports should be regularly reconciled with bank statements and GST portals (GSTR-2B).
Know what the Merchant Discount Rate is Merchant discount rate, or MDR, is the fee a merchant or shopkeeper pays banks and payment service providers for using debit/credit cards or digital payment facilities such as point-of-sale machines or payment gateways.