NEW DELHI, SEPTEMBER 16, 2026 ;The introduction of Merchant Discount Rate (MDR) on certain high-value UPI merchant transactions from October 15 is expected to have GST implications for businesses, with tax experts saying the 0.4 per cent MDR will attract 18 per cent GST.
However, GST-registered merchants with eligible taxable supplies can claim Input Tax Credit (ITC) on the GST paid on the MDR, potentially reducing or neutralising the additional tax burden.
Under the new framework, UPI payments made to merchants (P2M) above ₹2,000 will attract an MDR of 0.4 per cent, subject to an overall cap of ₹300 per transaction.
A concessional flat MDR of ₹5 will apply to specified categories, including railways, telecom services, insurance and fuel, for transactions exceeding ₹2,000.
GST Applies to MDR, Not the UPI Transaction Value
Tax experts have clarified that the proposed 18 per cent GST will apply to the MDR/service charge, rather than the underlying amount transferred through UPI.
For example, on a ₹10,000 eligible merchant transaction, an MDR of 0.4 per cent would amount to ₹40. The applicable 18 per cent GST on that MDR would be ₹7.20, subject to the applicable rules and exemptions.
Thus, GST would not be calculated on the entire ₹10,000 transaction value.
Registered Merchants May Claim Input Tax Credit
AMRG Global Managing Partner Rajat Mohan said the introduction of MDR on qualifying UPI transactions would have important GST implications for the digital payments ecosystem.
According to him, payment settlement services represented by the MDR would attract 18 per cent GST. He estimated that the MDR-related GST could generate substantial additional revenue for the government.
At the same time, he noted that eligible registered businesses would be able to claim ITC on GST paid on the MDR, reducing their effective tax burden.
Nangia Global Executive Director – Indirect Tax Sivakumar Ramjee similarly said GST would apply only to the merchant fee and not to the core UPI transaction value.
For large GST-registered businesses making taxable supplies, the GST paid on eligible MDR charges can generally be claimed as ITC, subject to applicable conditions.
However, merchants dealing in GST-exempt goods or services may not be able to utilise the credit in the same manner and could therefore bear the GST cost on MDR.
Potential Revenue for Government
Tax experts have offered varying estimates of the potential GST revenue arising from the new MDR framework.
According to Rajat Mohan, the MDR-related GST could generate an estimated ₹3,500 crore to ₹4,000 crore annually.
Sivakumar Ramjee projected potential annual GST collections of more than ₹5,000 crore, based on current transaction volumes.
AKM Global Lead – Indirect Tax Ikesh Nagpal used reported monthly merchant-payment volumes above ₹2,000 to estimate gross GST of approximately ₹432 crore per month, or around ₹5,184 crore annually, assuming a uniform 0.4 per cent MDR.
He stressed that this was an indicative calculation before accounting for exemptions, concessional MDR rates and transaction caps.
The government’s net additional revenue would also be lower than the gross GST amount to the extent that eligible businesses claim ITC.
High-Value UPI Payments Growing
The share of P2M UPI transactions above ₹2,000 has increased steadily, rising from 15.1 per cent in FY2023 to 20.1 per cent in the June quarter of FY2027, according to the figures cited by tax experts.
The increase reflects the growing use of UPI for higher-value purchases and merchant payments.
Impact on Small Merchants
The new structure contains provisions aimed at keeping smaller transactions outside the MDR framework.
Transactions below the ₹2,000 threshold will not attract the newly introduced 0.4 per cent MDR, while specified merchant categories will receive concessional treatment.
Tax experts said the structure is therefore likely to have a greater direct impact on larger-value merchant transactions and businesses that are subject to the MDR.
For GST-registered businesses making taxable supplies, the availability of ITC could substantially reduce the effective impact of the GST component.
Experts Highlight Different Revenue Estimates
EY India Tax Partner Saurabh Agarwal said the 18 per cent GST would be levied on MDR charges recovered by banks from merchants.
He said that where banks provide a separate statement or GST invoice showing the applicable charges, eligible merchants could use the GST as ITC against their output GST liability, subject to statutory conditions.
AKM Global’s Ikesh Nagpal also emphasised that the GST would apply to the service charge rather than the underlying UPI payment amount.
The differing revenue estimates offered by experts reflect assumptions concerning transaction volumes, applicable MDR rates, exemptions, concessional categories, caps and the extent to which businesses will be eligible to claim ITC.
What Merchants Need to Know
The key implications of the new framework are:
- 0.4% MDR on specified UPI merchant transactions above ₹2,000.
- ₹300 maximum MDR cap for the applicable transactions.
- 18% GST on the MDR, rather than on the entire UPI transaction value.
- Eligible GST-registered merchants may claim ITC, subject to applicable conditions.
- Merchants dealing in exempt supplies may not be able to fully utilise the credit.
- Certain sectors will have a concessional ₹5 MDR.
- Revenue estimates remain indicative and will depend on actual transaction patterns and exemptions.
The new framework is set to alter the economics of certain high-value UPI merchant transactions while retaining the distinction between the underlying digital payment and the service charge associated with payment settlement.
