UPI MDR above Rs 2,000 to attract 18% GST, merchants can claim input tax credit
Sep 16, 2026
Synopsis
UPI payments to merchants above two thousand rupees will attract a zero point four percent merchant discount rate. Merchants will pay eighteen percent GST on these charges, which is effective October 15th. Registered merchants can claim input tax credit on the GST paid on these fees. This tax structure aims to generate significant GST revenue for the government annually.
The new merchant discount rate (MDR) on UPI payments above Rs 2,000 will attract 18% Goods and Services Tax (GST), but eligible merchants can claim input tax credit (ITC) on the tax paid, helping offset the additional cost, tax experts said on Wednesday.
From October 15, merchant payments (P2M) above Rs 2,000 will attract an MDR of 0.4%, subject to an overall cap of Rs 300. A flat concessional MDR of Rs 5 will apply to transactions above Rs 2,000 in specified categories, including railways, telecom services, insurance and fuel.
The MDR is a charge for payment processing and settlement services and will be borne by merchants. GST will apply to the service fee rather than the underlying UPI transaction value.
The change comes as higher-value merchant payments account for an increasing share of UPI activity. The share of P2M transactions above Rs 2,000 rose from 15.1% in FY23 to 20.1% in the June quarter of FY27.
AMRG Global Managing Partner Rajat Mohan told PTI the new MDR regime would have significant GST implications for the digital payments ecosystem, with the 18% tax applying to the MDR billed to merchants.
The proposed MDR could generate an estimated Rs 3,500-Rs 4,000 crore in annual GST collections, he said.
"However, the regulatory structure provides crucial relief: registered merchants absorbing these fees can claim Input Tax Credit (ITC) on the GST paid, heavily softening their overall tax burden," Mohan said.
Nangia Global Executive Director - Indirect Tax Sivakumar Ramjee told PTI the GST would be levied only on the merchant fee and not on the underlying payment amount.
"For large, GST-registered enterprises, this tax creates minimal friction as it qualifies fully for Input Tax Credit, effectively neutralising the tax hit. Concurrently, strict exemptions for small vendors and transactions under Rs 2,000 completely insulate the grass-roots retail economy," Ramjee said.
Merchants that have an output GST liability can claim ITC on the GST paid on MDR, Ramjee said. However, businesses dealing in exempt goods and services would have to bear the GST cost on the MDR.
Based on current transaction volumes, Ramjee estimated that the tax-on-MDR model could generate more than Rs 5,000 crore a year in additional GST revenue for the government.
EY India Tax Partner Saurabh Agarwal said the 18% GST would be recovered by banks from merchants along with the MDR.
"However, where the bank provides the statement indicating such charges separately or a GST invoice, the same would be available as an input tax credit to the merchant which can be used to set off the output GST liability of the merchant," Agarwal said to PTI.
AKM Global Lead-Indirect Tax Ikesh Nagpal said the GST would apply to the service charge rather than the UPI payment itself, and eligible merchants would be able to claim it as ITC.
Nagpal estimated that using the reported monthly value of Rs 6 lakh crore in merchant payments above Rs 2,000, a uniform 0.4% MDR would result in gross GST collections of about Rs 432 crore a month, or Rs 5,184 crore annually.
"Using the reported monthly value of Rs 6 lakh crore in merchant payments above Rs 2,000, a uniform 0.4 per cent MDR would imply gross GST of approximately Rs 432 crore a month, or Rs 5,184 crore annually. This is an indicative calculation before accounting for merchant exemptions, concessional charges and transaction caps. The government's net additional revenue would be lower, as eligible businesses could claim input tax credit on GST paid on MDR," Nagpal said.
The effective tax burden will therefore vary across merchants depending on their GST registration, the nature of their supplies and their ability to utilise ITC.
[The Economic Times]
