Bonanza for shopkeepers before the festive season:Govt clarifies it will refund merchants’ GST amount on UPI transactions

The government on Tuesday clarified that it will refund GST charges on UPI transactions paid by shopkeepers. UPI regulator, the National Payments Corporation of India (NPCI), announced on its X handle that shopkeepers who pay GST on UPI charges for P2M (person-to-merchant) transactions over ₹2,000 will get a full refund of the tax. Here’s an example: Customer makes a UPI payment of ₹10,000. In that case, the merchant’s MDR (merchant discount rate) is 0.4%. MDR equals ₹40 GST on ₹40 MDR at the 18% slab is ₹7.20 The merchant initially pays ₹47.20 in MDR + GST. But the ₹7.20 GST is not treated as the merchant’s final cost. If the merchant collects, say, ₹500 GST from customers on its sales, it can subtract the ₹7.20 GST already paid on MDR: ₹500 GST collected – ₹7.20 GST paid on MDR = ₹492.80 GST payable to the government. So, in effect, the merchant bears the MDR, but the GST paid on that MDR can be claimed as input tax credit and adjusted against its GST liability. Expert opinion:As most of Merchants who will be impacted by MDR are registered in GST, they will be able to claim GST Inputs on GST on MDR, so GST on MDR will not be additional cost on them. – CA Ashish Niraj, Partner, A S N Company, Chartered Accountants Understand the subject in the following FAQs: Q: What changes are going to be made to the UPI payment rules from 15 Oct? Ans: 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. Q: Will ordinary customers have to pay any charge when making UPI payments? Ans: 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. Q: Will 18% GST be levied on ₹2,000 or on the entire UPI transaction amount? Ans: 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. Q: If MDR is charged at a flat rate of ₹5, how much GST will be levied? Ans: 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. Q: Can merchants claim input tax credit on this GST? Ans: 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. Q: What impact will this have on small shopkeepers and businesses? Ans: 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. Q: Can MDR be imposed on any trader with a turnover of less than ₹40 lakh? Ans: Yes, 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. Q: Can shops or merchants recover the MDR charge from customers? Ans: 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. Q: How should companies and shopkeepers record this in their accounts? Ans: Experts advise businesses to maintain four separate records when accounting for their UPI payments… Total amount received from customers MDR expense GST input credit Net amount settled into the bank account 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.