GST on UPI merchant discount rates: NPCI clarifies impact for small traders

The National Payments Corporation of India (NPCI) has clarified the mechanics of GST application on merchant discount rates (MDR) for UPI transactions, moving to allay fears among small traders about the tax's impact on their businesses.

According to NPCI's explanation, GST will be levied only on the MDR amount charged to selected merchants, not on the entire transaction value. The tax authority will calculate the levy based on the actual discount rate paid, rather than the gross transaction amount.

In a practical example cited by NPCI, a transaction worth Rs 10,000 would not attract GST on the full amount. Instead, if the MDR charged is Rs 40, the 18 percent GST would apply only to that Rs 40 fee, resulting in a GST liability of Rs 7.20 on the transaction.

The clarification comes as the government moves to bring UPI payments under the GST framework, a development that has raised questions about how the tax would be calculated and what burden it would impose on small business owners who rely heavily on digital payment modes. NPCI's statement attempts to demonstrate that the tax impact on individual transactions will remain minimal under this calculation method.

The distinction between the transaction amount and the MDR charge is expected to be significant for small traders, who have increasingly adopted UPI as a payment mode following government incentives to promote digital transactions across the economy.