The debate over the applicability of Goods and Services Tax (GST) on UPI Merchant Discount Rate (MDR) has intensified, with the National Payments Corporation of India (NPCI) maintaining that the majority of UPI transactions and small merchants will remain unaffected by the UPI MDR issue. NPCI said recent reports suggesting that GST on UPI MDR would increase costs for small merchants are incorrect. According to NPCI, MDR applies only to person-to-merchant (P2M) UPI transactions above Rs 2,000, while transactions up to Rs 2,000 continue to have zero MDR and, consequently, no GST impact.
“Certain media reports have alleged that GST on UPI Merchant Discount Rate (MDR) will burden small merchants and make digital payments costly. This is incorrect,” NPCI said. The organisation pointed out that government data shows transactions of up to Rs 2,000 account for more than 96% of UPI merchant transaction volume. As a result, it said, the overwhelming majority of UPI payments will not attract MDR or GST on MDR.
GST on UPI MDR can be adjusted against output tax
NPCI also said that GST paid on MDR by a merchant can be adjusted against the GST payable on the sale of goods, similar to the way input taxes are set off against output tax liability. “Consequently, merchants do not bear the cost of GST on the MDR amount paid by them,” NPCI said. It further stated that merchants with monthly UPI receipts of up to Rs 1 lakh are not liable to pay MDR and therefore do not face the issue of GST on MDR.
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However, concerns have been raised over how the rules will work for small businesses and informal vendors in practice. A consumer questioned whether the framework could create additional complexity for small vendors such as tea sellers, dhabas, vegetable vendors and fruit juice sellers. “UPI- why make economic life more complicated than it already is? The local chatwalla, dhabas, vegetable-and fruit juice sellers surely have daily income of Rs 5000. That income totals to more than Rs 1 lakh per month. So they will be classified as P2M and charged a MDR fee of 0.4%. Who will determine the monthly income of millions of such vendors and yet prevent harassment? Huge incentive to shift back to cash. Let’s not prematurely disturb the UPI status quo,” the consumer said.
NPCI, however, clarified that MDR is not calculated simply on the basis of a merchant’s daily sales. “Dear Sir, MDR is not charged based on a merchant’s total daily sales. For example, chai vendors, vegetable sellers, and other street vendors do not pay MDR on UPI payments of Rs 2,000 or less, regardless of their daily sales. The 0.4% MDR only applies when a single transaction is above Rs 2000,” NPCI said.
How will merchants move into P2M?
The discussion also raised questions about when a vendor moves from the person-to-person (P2P) category to the P2M category and how the Rs 1 lakh monthly threshold will be determined. “A vendor shifts from the P2P category to P2M category the moment her income crosses Rs 1 lakh per month. And then the MDR fees becomes applicable. Who will determine when they have crossed that income limit? Some inspectors I suppose. Can you not imagine a grocery shop doing one sale of more than Rs 2000 – and being in the P2M category as well,” the consumer asked.
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NPCI responded that the classification is done by the acquiring bank. “Dear Sir, if a merchant’s monthly sales exceed Rs 1 lakh, the acquiring bank categorises the merchant under P2M. MDR will apply only to UPI transactions that are above Rs 2,000,” NPCI said. The exchange highlights the larger debate around maintaining UPI’s low-cost digital payment model while introducing mechanisms for transactions where MDR is applicable. While NPCI has sought to clarify that small-value UPI transactions remain outside the MDR framework, concerns remain around merchant classification, compliance and how the rules will be implemented across India’s large and diverse base of small businesses.
