Under Goods and Services Tax regime: State govts oppose Centre’s proposal on sharing MDR burden

States unwilling to share Merchant Discount Rate charges for GST payments up to Rs 1 lakh using debit cards

Written by Aanchal Magazine | New Delhi | Published:June 7, 2017 1:30 am

Several states, including those ruled by the BJP, have opposed the Centre’s proposal that the burden of Merchant Discount Rate (MDR) charges should be shared between the Centre and states for payments of taxes up to Rs 1 lakh through debit cards under the Goods and Services Tax (GST) regime. Lower MDR charges, which merchants pay every time a debit card or credit card is swiped at their end for a transaction by a customer, have been a key component of the Centre’s post-demonetisation digital push. At the fourteenth GST Council meeting held in Srinagar, states including Haryana, Assam, Rajasthan and Odisha are learnt to have aired their opposition to taking on additional financial burden.

States such as Delhi were of the view that since the Centre had been bearing this expense, it should continue to do so, while Puducherry stated that the burden on the state governments should be worked out before taking a decision on the mechanism to split the MDR charges between the states and the Centre. During the discussions, the Andhra Pradesh government stated that since demonetisation, the Central government had been giving incentives to make payments by credit and debit cards, so the state governments should not be given this burden after the GST rollout.

While Uttar Pradesh government suggested that the Central government could bear the entire charge for the first two years and then the states could take a call whether to bear this charge or not, some other states have sought details regarding the likely financial burden on the state governments if the MDR charges for payment of GST by debit card up to Rs 1 lakh was to be borne by the state and Central governments. As the discussions remained inconclusive in view of the reservations expressed by the states, the Centre, sources said, suggested deferment of the proposal for the time being and suggested reintroduction of the proposal at a later date after ascertaining the likely financial implication of this proposal.

Under the GST regime, it had been provided that taxpayers would be able to make payments of CGST, SGST, IGST and the GST compensation cess by a single transaction, through a single challan. A decision needed to be taken on the sharing of MDR charges for GST payments up to Rs 1 lakh using debit cards, between the states and the Centre.

The Centre was of the view that splitting of charges between the states and the Centre based on the amount of CGST, IGST or SGST collected using a single challan might not be the most appropriate option, as a large amount of IGST which was a single levy would also ultimately accrue to the states due to cross-utilisation of credit. Similarly, SGST collected by states would also be used for payment of IGST due to cross-utilisation. Therefore, it was suggested that a better way of sharing the MDR charges between the Centre and the states might be to split these charges, in proportion of final GST revenues accruing to the states and the Centre after cross-utilisation and apportionment processes are finalised.

After demonetisation, with an aim to incentivise the use of digital economy, the central government had decided to bear the applicable MDR charges of payment of government dues (taxes, non-taxes and other payments) up to Rs 1 lakh made by Indian citizens using debit cards. The government had also directed central government departments and PSUs not to pass transactions fee/MDR charges associated with payment through digital means to the consumers and directed them to bear all such expenses, including those at fuel stations, till December 31. It had also advised the state governments and its organisations to consider to absorb the transaction fee/MDR charges related to digital payment to them and not ask the consumers to bear it.

The Reserve Bank of India (RBI) has come out with draft norms pertaining to the MDR, proposing to link the MDR to the annual revenue of the merchant. Till then, the existing charges will continue beyond March 31. According to the existing guidelines, the MDR for debit card payments, including for payments made to the government, is capped at 0.25 per cent for transactions up to Rs 1,000 and 0.5 per cent between Rs 1,000-2,000. The existing MDR cap is 0.75 per cent for transactions up to Rs 2,000 and one per cent for over Rs 2,000. However, there is no RBI cap on MDR on credit card payments.

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