GST on UPI MDR: Can Businesses Claim Input Tax Credit?
Digital payment costs are set to change for many Indian merchants. From October 15, a Merchant Discount Rate (MDR) will apply to UPI payments above Rs 2,000, and 18% GST will be charged on that fee. A senior finance ministry official has now clarified that GST-registered businesses can claim this tax back as input tax credit (ITC). The picture is less clear for a small group of unregistered sellers.
This guide explains what is changing, how much merchants will pay, and who is likely to feel the impact.
What Is Changing in UPI Payments from October 15?
The National Payments Corporation of India (NPCI) recently announced a revised MDR framework for UPI payments made to merchants. The new charges apply only to transactions above Rs 2,000. The main rates are:
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0.4% of the transaction value, capped at Rs 300, for most merchant categories
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A flat fee of Rs 5 for certain specified categories
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0.02% for capital market transactions
The GST Council is scheduled to meet on October 7, just before the new rules begin. The official did not say whether this issue will be on the agenda.
How Much Will Merchants Pay? (With Examples)
GST at 18% is levied on the MDR amount, not on the payment itself.
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Payment Amount
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MDR Applied
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MDR Fee
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GST @ 18%
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Total Cost
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Rs 10,000
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0.4%
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Rs 40
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Rs 7.20
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Rs 47.20
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Any eligible amount
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Flat Rs 5
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Rs 5
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Rs 0.90
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Rs 5.90
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Since the 0.4% fee is capped at Rs 300, it stops rising once a payment crosses roughly Rs 75,000.
Can GST Paid on UPI MDR Be Claimed as Input Tax Credit?
Yes, for registered businesses. The official said that any business registered under GST can claim the 18% paid on the MDR as input tax credit, so the tax does not become a permanent cost for them.
ITC is available only to GST-registered taxpayers. Most sellers of goods must register once annual turnover crosses Rs 40 lakh, and the limit for service providers is Rs 20 lakh. Some states follow different limits.
Which Merchants May Still Be Affected?
Some merchants can fall through the gap. A seller may:
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have annual turnover below Rs 40 lakh, so is not registered under GST, and
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receive more than Rs 1 lakh per month through UPI, so does not qualify as a "small merchant" exempt from MDR.
If such a seller accepts UPI payments above Rs 2,000, they may pay MDR plus GST and, without a GST registration, cannot claim the credit. The official acknowledged this possibility.
Why the Government Expects Limited Impact
According to the official, the group facing this problem should be very small, for these reasons:
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Most transactions are below the threshold. About 96% of person-to-merchant (P2M) UPI transactions are under Rs 2,000.
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Small sellers rarely receive big payments. For merchants with turnover under Rs 40 lakh, roughly 99% of UPI payments may fall below Rs 2,000.
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Many small sellers stay below the monthly limit. Those receiving under Rs 1 lakh a month in UPI payments remain exempt from MDR.
The official described the issue as minor and said the GST Council can address it at the right time. He also noted that GST decisions rest with the Council, not the government alone.
What Merchants Should Do Now
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Registered businesses: Record GST paid on MDR properly so ITC can be claimed in your returns.
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Unregistered sellers: Check your monthly UPI receipts. If you cross Rs 1 lakh, MDR may apply to payments above Rs 2,000.
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All merchants: Watch the outcome of the GST Council meeting on October 7 for any relief or clarification.
Key Takeaways
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MDR applies to UPI merchant payments above Rs 2,000 from October 15.
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18% GST is charged on the MDR fee.
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GST-registered businesses can claim this GST as input tax credit.
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Unregistered sellers with high monthly UPI receipts may bear the extra cost.
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The government expects very few merchants to be affected.
FAQs
Is GST charged on the full UPI payment?
No. GST at 18% applies only to the MDR fee, not to the transaction amount.
Do all UPI payments attract MDR?
No. MDR applies only to payments above Rs 2,000 made to merchants. Smaller payments are unaffected.
Who can claim input tax credit on GST paid on UPI MDR?
Only businesses registered under GST can claim ITC.
Will small shopkeepers have to pay MDR?
Most will not, since they typically receive under Rs 1 lakh a month via UPI or few payments above Rs 2,000. Sellers above these levels may be charged.
When will the new MDR rules start?
October 15.