MDR and GST on UPI Merchant Payments Above ₹2,000

MDR and GST on UPI Payments Above ₹2,000

Why in News?

• The National Payments Corporation of India (NPCI) has clarified concerns over the proposed Merchant Discount Rate (MDR) and 18% GST on MDR for certain high-value UPI merchant payments. 
• The revised framework will apply to Person-to-Merchant (P2M) UPI transactions above ₹2,000 from October 15, 2026. 
• NPCI stated that such transactions account for only around 4% of P2M UPI payments, meaning about 96% will remain outside the MDR framework. 

Key Provisions:

• MDR: A fee charged to merchants for accepting digital payments. It covers costs involved in processing and settling digital transactions. 
• The proposed MDR for eligible UPI transactions may range between 0.25% and 0.4%. 
• P2P transactions and UPI payments below the applicable threshold will continue to remain free. 
• Merchants receiving less than ₹1 lakh per month through UPI will be exempt from MDR.
• GST-registered merchants can claim Input Tax Credit (ITC) on the GST paid on MDR, subject to applicable rules. 
• However, unregistered businesses may not be able to claim ITC, creating a possible cost for some medium-sized merchants. 

Why is MDR being introduced?

• UPI has operated with zero MDR since January 2020 to encourage digital payments. 
• Government compensation has supported banks, NPCI and payment service providers. 
• The Parliamentary Standing Committee on Finance has supported a self-sustaining, tiered MDR framework for higher-value merchant transactions. 
• The objective is to ensure adequate funding for cybersecurity, fraud prevention and payment infrastructure, while protecting small merchants and P2P payments. 

Concerns:

• Businesses may face additional accounting and reconciliation requirements. 
• Incorrect GST reporting by banks or payment providers could affect ITC claims. 
• The GST Council is expected to consider issues related to the framework. 

About National Payments Corporation of India (NPCI):

• NPCI was incorporated in 2008 as an umbrella organisation for India’s retail payment and settlement systems. 
• It was established as an initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) under the Payment and Settlement Systems Act, 2007. 
• Promoter Banks: Its 10 initial promoter banks included SBI, PNB, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC. 
• Objective: To develop secure, efficient and affordable digital payment systems and promote financial inclusion. 

Major Initiatives

• UPI (2016): Enables instant bank-to-bank digital payments through smartphones for Person-to-Person (P2P) and Person-to-Merchant (P2M) transactions. 
• RuPay (2012): India’s domestic card payment network, offering debit, credit and prepaid cards. 
• IMPS: Provides instant, 24×7 fund transfers, including on bank holidays. 
• BBPS: A unified platform for paying utility bills such as electricity, water, gas and telecom bills. 
• AePS: Enables basic banking services using Aadhaar number and biometric authentication. 
• NFS: Connects banks’ ATMs and enables services such as cash withdrawal, fund transfer and balance enquiry. 
• NETC: Facilitates electronic toll collection through FASTags using RFID technology, helping reduce waiting time and traffic congestion. 

Practice Question

Q. With reference to UPI, Merchant Discount Rate (MDR) and the National Payments Corporation of India (NPCI), consider the following statements:

1. The proposed MDR framework applies to all UPI transactions exceeding ₹2,000, including Person-to-Person (P2P) transactions. 
2. A merchant receiving less than ₹1 lakh per month through UPI is exempt from MDR under the stated framework. 
3. GST-registered merchants may claim Input Tax Credit on GST paid on MDR, subject to applicable rules. 
4. NPCI was incorporated in 2008 on the initiative of RBI and IBA under the Payment and Settlement Systems Act, 2007. 
5. RuPay, IMPS and BBPS are among the major payment initiatives developed by NPCI. 

Which of the statements given above are correct?

A. 2, 3, 4 and 5 only
B. 1, 2 and 3 only
C. 1, 4 and 5 only
D. 2 and 5 only

Answer: A. 2, 3, 4 and 5 only

Explanation:

• The proposed MDR applies to specified Person-to-Merchant (P2M) UPI transactions above ₹2,000; P2P transactions remain free. Hence, Statement 1 is Incorrect. 
• Merchants receiving less than ₹1 lakh per month through UPI are exempt from MDR. Hence, Statement 2 is Correct. 
• GST-registered merchants can claim Input Tax Credit (ITC) on GST paid on MDR, subject to applicable rules. Hence, Statement 3 is Correct. 
• NPCI was incorporated in 2008 as an initiative of RBI and IBA under the Payment and Settlement Systems Act, 2007. Hence, Statement 4 is Correct. 

RuPay, IMPS and BBPS are major NPCI initiatives. Hence, Statement 5 is Correct.