Summary: Merchant Discount Rate (MDR) is a service charge for processing digital payments, verifying transactions and settling funds rather than a component of the price of the underlying goods or services. Where MDR of 0.40% is charged, GST at 18% on the MDR results in an effective charge of 0.472%. The illustration considers a transaction where the amount transferred through UPI includes GST and MDR is calculated on that aggregate transaction value, with GST then charged on the MDR. NPCI has clarified that MDR will not apply to more than 96% of small merchant transactions involving payments up to ₹2,000 and that merchants whose monthly UPI receipts are up to ₹1 lakh will not be required to bear MDR and GST. Merchants liable to pay MDR may be eligible to claim Input Tax Credit of GST paid on MDR, meaning the GST may not ultimately constitute a cost for eligible registered merchants. The practical position differs for unregistered businesses and composition taxpayers. Small merchants below the applicable GST registration threshold may have to consider whether voluntary registration and the resulting compliance obligations are worthwhile merely to obtain ITC. Composition taxpayers cannot claim Input Tax Credit, so GST paid on MDR may remain a genuine non-recoverable business cost for them.
GST on Merchant Discount Rate (MDR)
Merchant Diuscount Rate (MDR) is not a component of the price of goods or services charged to the customer. It is a service charge levied for processing digital payments, verifying transactions and settling the funds. Accordingly, GST is applicable on the actual MDR amount charged and paid. As clarified by government officials, since the MDR actually charged represents consideration for a service, it will attract GST at 18%. GST will apply not merely to the original value of the UPI transaction but to the aggregate amount inclusive of GST, since the amount being transferred includes GST. (Of course, if the Government provides any concession in future, the same may apply.)
Thus, on an MDR of 0.40%, GST at 18% works out to 0.072%, making the effective charge 0.472%.
Under the Income-tax Act, TDS is not deducted on the GST component separately shown in an invoice. However, in the present situation, GST would also be payable on the MDR applicable to the GST-inclusive transaction value.
For example, if a customer purchases goods worth ₹10,000 from a merchant through UPI and pays ₹1800 as GST, the total amount paid through UPI would be ₹1,1800. If MDR is charged at 0.40% on the entire transaction value, the MDR would not be ₹4 but ₹47.20 on ₹1180. GST at 18% on the MDR of ₹47.20 would amount to ₹8.50. Consequently, the total additional cost would be ₹55.70.
This means that the MDR-related cost is 0.472% of the customer’s total payment of ₹1,180 and approximately 0.557% of the pre-GST value of ₹1,000.
The National Payments Corporation of India (NPCI) has clarified that, because GST is being levied on MDR on certain UPI transactions, MDR will not apply to more than 96% of small merchant transactions involving payments of up to ₹2,000, and consequently the question of GST on such transactions will also not arise. Further, merchants whose monthly UPI receipts are up to ₹1 lakh will not be required to bear MDR and GST.
Another important point highlighted by NPCI is that merchants who are required to pay MDR may be eligible to claim Input Tax Credit (ITC)of the GST paid on MDR. Therefore, for such registered merchants, the GST may not ultimately constitute a cost.
However, in practice, this benefit may not be available to every merchant because of the GST registration threshold. Suppliers of services are generally not required to obtain GST registration until their turnover exceeds ₹20 lakh, while suppliers of goods are generally subject to a threshold of ₹40 lakh, subject to applicable conditions and exceptions.
Merchants whose turnover is below the mandatory GST registration threshold would therefore have to consider obtaining voluntary GST registration merely to claim ITC on GST paid on MDR. Once registered, they would also have to undertake regular GST compliance, including filing returns, maintaining records and fulfilling other statutory requirements. Whether obtaining GST registration solely to save the GST component on MDR is financially worthwhile for a small merchant is therefore an important practical question.
An even more significant issue concerns the 1.50 crore number of merchants registered under the Composition Scheme across the country. Since composition taxpayers are not entitled to claim Input Tax Credit under the GST law, they cannot claim credit of the GST paid on MDR. Consequently, for such merchants, GST on MDR may become a real and non-recoverable cost.
Conclusion: The introduction of GST on MDR brings a new cost dimension to digital payments and highlights the need to examine the economic impact beyond the headline MDR rate. While the proposed 0.40% MDR may appear modest, the additional 18% GST and its application on the transaction value can increase the effective cost for merchants. For GST-registered businesses eligible for input tax credit, this GST may largely remain a recoverable tax and therefore may not constitute a final cost. However, small unregistered merchants and composition taxpayers may not be able to claim such credit, making the GST on MDR a genuine business expense. The issue therefore needs to be viewed not merely from the perspective of payment processing charges but also from the standpoint of GST registration, compliance and credit eligibility. As UPI continues to expand, clarity on the scope, exemptions and credit mechanism for GST on MDR will be important to ensure that the move does not unintentionally increase the cost of digital transactions for small merchants.
