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Are UPI Payments Subject to GST?
As of January 2025, individual users conducting UPI transactions are not directly subjected to GST. In its 54th meeting held on 9th September 2024, the GST Council deliberated on imposing an 18% GST on payment aggregators for transactions below ₹2,000. However, no definitive decision was reached, and the matter was referred to the fitment committee for further analysis.
It’s essential to understand that any potential GST levy would target the service fees charged by payment aggregators, not the transaction amount itself. Currently, payment aggregators impose charges ranging from 0.5% to 2% on transactions. The proposed 18% GST would apply to these service charges, not directly affecting the end-users.
Customers or Merchants: Who Will Bear the GST on UPI Payments?
When it comes to GST on UPI payments, the tax burden primarily falls on merchants and payment service providers rather than individual users. As an end-user, you don’t directly pay GST for UPI transactions. However, merchants and payment aggregators incur GST charges on service fees associated with UPI payments.
For instance, merchants using payment platforms may face higher service charges due to GST. This could indirectly lead to increased product or service prices for customers, as merchants might pass on the additional costs.
Payment aggregators, on the other hand, might bear the GST cost on service charges, adding pressure to their margins. This could limit the flexibility for offering competitive transaction fees, especially for small businesses and professionals.
Small businesses, startups, and freelancers relying heavily on UPI payments should assess these changes carefully. If you’re a merchant, consider the potential rise in your operating costs and explore ways to mitigate its impact, such as negotiating with payment providers or adjusting pricing strategies.
Example Scenario of GST on a UPI Transaction
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Purchase and Payment:
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The consumer selects a product worth ₹1,000.
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Payment is made using UPI.
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Merchant’s Perspective:
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The merchant receives the ₹1,000 payment through a payment aggregator (e.g., PhonePe, Razorpay, etc).
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Payment aggregators typically charge merchants a service fee, known as the Merchant Discount Rate (MDR), which can range from 0.5% to 2% per transaction.
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Service Fee and GST:
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Assuming an MDR of 1%, the service fee on the ₹1,000 transaction is ₹10.
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This service fee will be subject to an 18% GST.
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GST on the service fee amounts to ₹1.80 (i.e., 18% of ₹10).
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Total Deductions:
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The total amount deducted from the merchant is the service fee plus GST: ₹10 + ₹1.80 = ₹11.80.
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Net Amount Received by Merchant:
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The merchant receives ₹1,000 – ₹11.80 = ₹988.20.
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How GST Affects UPI Users and Merchants?
1. Individual Users
As an individual UPI user, you remain largely unaffected by the GST on UPI payments. The GST targets service fees charged by payment aggregators, not the transaction amounts. This means you can continue to enjoy UPI transactions without worrying about direct GST implications.
However, indirectly, you might notice slight price increases in goods or services if merchants adjust their pricing to offset the GST burden.
2. Merchants
Merchants may encounter increased service fees if payment aggregators decide to pass on the GST burden. This increment, though seemingly minor per transaction, can accumulate over numerous transactions, affecting profit margins.
To maintain profitability, merchants might contemplate revising their pricing strategies, potentially leading to higher prices for consumers.
Here are examples to properly understand how GST will affect individual users and merchants.
For Individuals
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You purchase a product worth ₹1,000 from a local store and pay using UPI.
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The merchant pays a 1% service fee, i.e., ₹10, for this transaction.
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With the proposed GST at 18% on the service fee, the total fee becomes ₹10 + ₹1.80 = ₹11.80.
While you don’t directly pay the GST, the merchant may adjust the product price to ₹1,010 to recover the additional cost. Over time, these minor price adjustments could add up, subtly affecting your overall spending.
For Merchants
A small retail shop processes 1,000 UPI transactions monthly, each averaging ₹2,000. With a 1% service fee:
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Current Monthly Service Fees: 1,000 transactions x ₹20 (1% of ₹2,000) = ₹20,000
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Proposed GST on Service Fees: 18% of ₹20,000 = ₹3,600
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Total Monthly Service Fees with GST: ₹20,000 + ₹3,600 = ₹23,600
In this case, the merchant would incur an additional ₹3,600 monthly due to the GST on service fees, potentially prompting a reassessment of pricing or operational strategies.
Advantages of GST on Digital Transactions
1. Transparency in Digital Payments
The implementation of GST on UPI payments is expected to bring greater transparency to the digital payment ecosystem. By ensuring that every transaction is documented, it will reduce the possibility of unreported income and promote better compliance with tax regulations. This increased accountability is likely to strengthen the financial system and benefit both businesses and the economy.
2. Ease of Tax Filing and Business Benefits
GST on UPI payments will simplify tax filing for businesses. Payment service providers will issue GST-compliant invoices, making it easier for businesses to track expenses and claim input tax credits.
For example, the GST paid on service fees for UPI payments could be claimed as input tax credit, reducing the overall GST liability. This will help small businesses, freelancers, and startups optimise their tax payments and manage cash flow more efficiently.
Conclusion
Understanding the implications of GST on UPI transactions is important for both consumers and merchants. While individual users remain unaffected directly, merchants and payment service providers must stay informed about potential changes to service fee structures and associated taxes.
By embracing these changes and leveraging the benefits of GST on digital transactions, businesses can enhance transparency, streamline compliance, and foster a more robust digital economy.
Frequently Asked Questions (FAQs)
1. How does GST affect merchants using UPI payments?
GST on UPI payments may increase the cost of transaction fees for merchants as payment service providers may pass on the GST burden. This may lead to higher operational costs, prompting merchants to adjust pricing or absorb the additional expense.
2. Does GST on UPI payments increase transaction costs?
Yes, GST on UPI payments can lead to an increase in transaction costs for merchants. Payment aggregators charge service fees (Merchant Discount Rate), which are planned for an 18% GST, which may add to the overall cost for merchants.
3. How can merchants claim GST input on UPI charges?
Merchants can claim GST input on UPI charges by ensuring that the payment service provider issues a GST-compliant invoice for the service fees, which includes the GST amount. Merchants must then record this input tax in their GST returns and offset it against their output GST liability.
4. How is GST on UPI payment services calculated?
GST on UPI payment services will be applicable at 18%, calculated on the service charges levied by the payment service provider. For example, if the service charge is ₹100, the GST will be ₹18, making the total cost ₹118.
5. Does GST registration apply to all businesses accepting UPI payments?
GST registration is mandatory for businesses that meet the prescribed turnover threshold, regardless of whether they accept UPI payments.
6. What is the turnover threshold for mandatory GST registration in India for UPI merchants?
As per current GST regulations, businesses with an annual turnover exceeding ₹40 lakhs (₹20 lakhs for special category states) are required to obtain GST registration. Smaller businesses below this threshold are not required to register, though they can do so voluntarily.
7. Can I face penalties for not registering under GST while using UPI payment systems?
Yes, businesses failing to register for GST when required may face penalties and interest charges for non-compliance. It’s essential to stay updated on turnover thresholds and register if necessary.
8. Is there a simplified way to reconcile GST on payment gateway charges?
Yes, many businesses use accounting software that integrates with their payment gateways to simplify the reconciliation of GST on transaction charges. This ensures accurate reporting and compliance without manual tracking.
9. How can merchants track UPI transactions for GST compliance?
Merchants can track UPI transactions by maintaining detailed records of all payment receipts and service charges. Many payment providers also offer transaction reports that simplify GST compliance and filing.