NPCI says fears over GST on merchant fee for big UPI payments ‘misplaced’

For the 4% of transactions to merchants that are above Rs 2,000 and facing an MDR – and therefore a GST – the seller will not have to bear the additional tax cost as it can claim input tax credit. This means, the GST paid on the MDR can be adjusted against the tax to be paid on the sale of goods “in the same manner that input taxes are set off against output tax liability”.

In most states, sellers of goods with an annual turnover of under Rs 40 lakh don’t have to register under GST. The threshold is Rs 20 lakh for service providers. Only those sellers who are registered under GST can claim input tax credit.

Further, small merchants who receive less than Rs 1 lakh per month as UPI payment are exempt from MDR and therefore do not have to pay GST.

“Hence, apprehensions that GST on MDR will impose an additional burden on merchants are misplaced. The overwhelming majority of UPI transactions and small merchants remain unaffected,” the NPCI said in a post on social media platform X.

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.

MDR applies only to P2M transactions above ₹2,000. Transactions up to ₹2,000 continue to have zero MDR and therefore…

— NPCI (@NPCI_NPCI) September 22, 2026

A merchant facing an MDR of 0.4% on a UPI payment of Rs 10,000 will have to first pay a fee of Rs 40 and GST of Rs 7.2 on that Rs 40. For those categories of payments where the MDR is a flat Rs 5, the GST will be 90 paise.

According to Deni Shah, Head of Customs & International Trade at Bhuta Shah & Co LLP, while the GST revenue to the government from a 0.4% MDR on UPI payments of over Rs 2,000 has been estimated to be as high as Rs 5,000 crore, the actual net revenue “could be close to zero as registered businesses can fully claim the same as an input tax credit”.

However, some UPI transactions will generate revenue for the government, Shah noted.

“While large, registered entities will be able to offset the input GST, mid-sized vendors earning over Rs 1 lakh monthly but falling below the annual GST registration threshold cannot claim ITC, meaning their high-value digital sales directly benefit the Government exchequer.”

Shah also warned that the GST on MDR “adds a major operational layer to a company’s financial routines” and increases administrative compliance burden. While merchants involved in business-to-business dealing only have a few large bills every month, the number of payments exceeding Rs 2,000 handled by consumer-facing sellers is “massive”. These businesses, according to Shah, must “meticulously reconcile thousands of MDR invoices” against relevant GST forms, with any mismatch leading to denial of ITC claims.

“Also, the ITC flow relies heavily on the correctness of tax compliances by the acquiring bank or payment aggregator charging the MDR. If the charging entity fails to file accurate GSTR-1 returns or correctly map the vendors GSTIN, the ITC will not be available, converting an administrative hassle into a permanent financial loss,” Shah added.

The NPCI’s statement comes after government sources clarified the same last week, although an official admitted that unregistered businesses who have an annual turnover of less than Rs 40 lakh but receive more than Rs 1 lakh every month as UPI payments may end up paying GST on payments of more than Rs 2,000. However, the official argued this would be a very small number of merchants and the matter can be “reasonably tackled by the GST Council”.

The MDR on UPI payments of more than Rs 2,000 comes into effect from October 15. The GST Council is set to meet on October 7. The official did not say whether the matter will be discussed at the Council meeting.

According to experts, merchants should prioritise correctly capturing in their accounting books the GST charged on MDR.

“Small and Medium Enterprises in particular should review their accounting systems and reconciliation processes so that transaction-level MDR and the corresponding GST can be matched with bank and payment gateway statements,” said Dilip B Desai, Founder and Chairman of professional services firm DHC.