Summary: The article examines the GST and input tax credit implications of the proposed Merchant Discount Rate (MDR) on specified UPI transactions from 15th October 2026. Using a consultancy transaction of Rs. 10,000 plus 18% GST, it explains that where the customer pays Rs. 11,800 through UPI and MDR of 0.4% is applied, the MDR would be Rs. 47.20 and GST at 18% on the MDR would be Rs. 8.50, resulting in an additional MDR-related amount of Rs. 55.70. The article discusses the distinction between GST forming part of the underlying supply and GST charged on the separate payment-processing service represented by MDR, and considers whether the latter should be described as “GST on GST”. It outlines the stated UPI framework for specified Person to Merchant transactions exceeding Rs. 2,000, including the 0.4% standard MDR, the Rs. 300 cap for transactions of Rs. 75,000 and above, concessional treatment for certain sectors and capital-market transactions, and the absence of MDR for P2P transactions and specified small P2PM merchants. It further considers the availability of ITC on GST paid on MDR under the normal GST conditions, including the relevance of Section 16 and the restrictions under Section 17(5) of the CGST Act. For a GST-registered merchant making taxable supplies, the article states that the Rs. 8.50 GST on MDR would be available as ITC subject to eligibility and utilisation, making the MDR itself the economic cost. It also discusses cases involving exempt supplies, composition taxpayers and unregistered merchants, the effect of the Rs. 300 cap, accounting and reconciliation requirements, and concludes that the GST on MDR is GST on a separate payment-processing service rather than GST being charged again on the GST included in the customer’s invoice.
Authors note: A GST registered client came to me asking, “Aman, my most of the business payments are received through UPI”, will I get ITC? What will be the treatment? So being a logical consulting engagement, I researched on it. Hope you will find it useul
Introduction
Authors note: A GST registered client came to me asking, “Aman, my most of the business payments are received through UPI”, will I get ITC? What will be the treatment? So being a logical consulting engagement, I researched on it. Hope you will find it useul
The new Merchant Discount Rate (MDR) on specified UPI transactions is introduced by our government from 15th October 2026. In market, has triggered an important indirect tax question “if a merchant pays MDR on a transaction that already includes GST, and GST is then charged on the MDR, are we effectively paying “tax on tax”?”, So, let’s discuss this in detail
Calculation and case study
For example, suppose STS Ventures is charging Rs. 10,000 + 18% GST for a consultancy
In this the value of services in my case is Rs. 10,000
GST @ 18% which shall be Rs. 1,800
Hence amount that needs to be paid by client will be Rs. 11,800
After 15th of October 2026
On this transaction, if client is paying me through UPI, then MDR @ 0.4% will be applicable on above transaction that will be Rs. 47.20, also it will attract GST @ 18% on MDR that will be Rs. 8.50, hence additional cost will be Rs. 55.70
This means the MDR-related cost is 0.472% of the customer’s gross payment of Rs. 11,800, and approximately 0.557% of the pre-GST value of Rs. 10,000, the main question that was asked by my client was is it legally correct to call this “GST on GST”?
Changes from 15 October 2026
NPCI’s which is the organisation regulating UPI transitions has revised framework to introduce MDR for specified Person to Merchant (P2M) UPI transactions that exceeds Rs. 2,000, for standard eligible transactions, the MDR is 0.4%, subject to a Rs. 300 cap for transactions of Rs. 75,000 and above.
The framework also provides different treatment for certain sectors and capital-market transactions, let me discuss this through a table
| category | MDR treatment |
|---|---|
| standard eligible P2M transaction more than Rs. 2,000 | 0.4% |
| transactions more than or equal to Rs. 75,000 | 0.4%, capped at Rs. 300 |
| certain essential/thin-margin sectors | Rs. 5 per transaction |
| mutual funds/securities/stockbrokers/dealers (See note) | 0.02%, capped at Rs. 300 |
| P2P transactions | No MDR |
| eligible small P2PM merchants up to Rs. 1 lakh/month | Zero MDR |
Note: UPI Mandates/AutoPay transactions used for recurring payments do not carry the prescribed MDR. This includes recurring payments such as mutual fund SIPs, insurance premiums, utility bills, OTT subscriptions and similar recurring transactions. This creates an important distinction between a one-time UPI payment and an automated recurring mandate.
These distinctions are important because “UPI will become chargeable” is an incomplete description of the framework. The charge depends upon the nature and category of the transaction.
GST on MDR
MDR is a charge for payment related services provided within the payment ecosystem. The current clarification reported by government officials is that 18% GST will apply to the MDR actually charged, and not to the underlying UPI transaction value itself, subject to any future exemption that may be provided by government.
In our example above, if the UPI MDR is calculated on the actual payment amount of Rs. 11,800 then the MDR will be Rs. 11,800 × 0.4% that is Rs. 47.20 on which GST will be Rs. 47.20 × 18% that is Rs. 8.5. Therefore total MDR including GST will be Rs. 55.70
Provision related to ITC
Suppose in our example as STS Ventures is registered in GST making taxable supplies of services, GST paid on eligible business input services is generally available as input tax credit, subject to the normal conditions and restrictions of the GST Act, for which I mean section 17(5) of GST Act, which gives conditions for blocked credit. Also, assuming STS Ventures is GST registered, the payment service is used in the course or furtherance of business, proper tax documentation is available, the credit is otherwise eligible and there is sufficient taxable output liability, the GST of Rs. 8.50 on MDR will be available as ITC. In that situation, the actual cost of MDR to the STS will be Rs. 47.20.
In above case, STS being GST registered making taxable supplies, MDR is Rs. 47.20 and GST on it is Rs. 8.50, hence potential ITC will be Rs. 8.50, net economic cost will be Rs. 47.20, subject to eligibility and utilisation. On the other hand if merchant making exempt supplies, If the GST on the MDR is not fully creditable because of the nature of the merchant’s supplies, then Rs. 8.50 may become an actual cost, same in case of composition taxpayer and unregistered merchant.
Relevance of Rs. 300 cap
The framework provides that for transactions of Rs. 75,000 and above, MDR is capped at Rs. 300 per transaction.
For example, STS Received Rs. 1,00,000 as a consultancy fees inclusive of GST, now MDR will be capped to Rs. 300 + Rs. 54 GST = Rs. 354
Therefore, after the Rs. 75,000 threshold, the effective MDR burden as a percentage of transaction value actually falls as transaction value increases.
Accounting implications for businesses
Businesses should ensure that their accounting systems separately capture gross UPI collections, MDR expense, GST charged on MDR, eligible ITC, net bank settlement, reconciliation with the payment service provider, and GST invoice or document for the MDR service.
For example client paid STS Rs. 11,800, on which MDR is Rs. 47.20, and GST on MDR will be Rs. 8.50, So, the bank settlement will be Rs. 11,744.30, hence, the books should not simply record Rs. 11,744.30 as sales, rather the gross revenue or invoice value and payment-processing charges need to be separately accounted for.
Conclusion
The introduction of MDR represents a structural change in the economics of the UPI ecosystem. UPI has historically been associated with a zero-MDR model for P2M transactions, with the Government supporting the ecosystem through various measures. The new framework seeks to introduce charges for specified high-value merchant transactions while retaining exemptions and concessional treatment for several categories, from a business perspective, the important issue is not merely whether MDR is 0.4%. The real question is What is the all-in cost of accepting the payment after MDR, GST on MDR, ITC availability and transaction caps are taken into account?
Also, the GST on MDR is not GST charged again on the GST forming part of the customer’s invoice, rather it is GST on a separate payment-processing service
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