TaxTMI 
TaxTMI 
New Tax on tax by UPI MDR- Treatment under GST and ITC
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....ew Tax on tax by UPI MDR- Treatment under GST and ITC<br>By: - Ca Aman Rajput<br>Goods and Services Tax - GST<br>Dated:- 22-9-2026<br>Introduction The new Merchant Discount Rate (MDR) on specified UPI transactions is introduced by our government from 15th October 2026. In market, has triggered an important indirect tax question "if a merchant pays MDR on a transaction that already includes GST, and GST is then charged on the MDR, are we effectively paying "tax on tax"?", So, let's discuss this in detail Calculation and case study For example, suppose STS Ventures is charging Rs. 10,000 + 18% GST for a consultancy In this the value of services in my case is Rs. 10,000 GST @ 18% which shall be Rs. 1,800 Hence amount that....
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.... needs to be paid by client will be Rs. 11,800 After 15th of October 2026 On this transaction, if client is paying me through UPI, then MDR @ 0.4% will be applicable on above transaction that will be Rs. 47.20, also it will attract GST @ 18% on MDR that will be Rs. 8.50, hence additional cost will be Rs. 55.70 This means the MDR-related cost is 0.472% of the customer's gross payment of Rs. 11,800, and approximately 0.557% of the pre-GST value of Rs. 10,000, the main question that was asked by my client was is it legally correct to call this "GST on GST"? Changes from 15 October 2026 NPCI's which is the organisation regulating UPI transitions has revised framework to introduce MDR for specified Person to Merchant (P2M)....
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.... UPI transactions that exceeds Rs. 2,000, for standard eligible transactions, the MDR is 0.4%, subject to a Rs. 300 cap for transactions of Rs. 75,000 and above. The framework also provides different treatment for certain sectors and capital-market transactions, let me discuss this through a table category MDR treatment standard eligible P2M transaction more than Rs. 2,000 0.4% transactions more than or equal to Rs. 75,000 0.4%, capped at Rs. 300 certain essential/thin-margin sectors Rs. 5 per transaction mutual funds/securities/stockbrokers/dealers (See note) 0.02%, capped at Rs. 300 P2P transactions No MDR eligible small P2PM merchants up to Rs. 1 lakh/month Zero MDR Note: UPI Mandates/AutoP....
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....ay transactions used for recurring payments do not carry the prescribed MDR. This includes recurring payments such as mutual fund SIPs, insurance premiums, utility bills, OTT subscriptions and similar recurring transactions. This creates an important distinction between a one-time UPI payment and an automated recurring mandate. These distinctions are important because "UPI will become chargeable" is an incomplete description of the framework. The charge depends upon the nature and category of the transaction. GST on MDR MDR is a charge for payment related services provided within the payment ecosystem. The current clarification reported by government officials is that 18% GST will apply to the MDR actually charged, and not to the u....
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....nderlying UPI transaction value itself, subject to any future exemption that may be provided by government. In our example above, if the UPI MDR is calculated on the actual payment amount of Rs. 11,800 then the MDR will be Rs. 11,800 x 0.4% that is Rs. 47.20 on which GST will be Rs. 47.20 x 18% that is Rs. 8.5. Therefore total MDR including GST will be Rs. 55.70 Provision related to ITC Suppose in our example as STS Ventures is registered in GST making taxable supplies of services, GST paid on eligible business input services is generally available as input tax credit, subject to the normal conditions and restrictions of the GST act, for which I mean section 17(5) of GST Act, which gives conditions for blocked credit. Also, assumin....
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....g STS Ventures is GST registered, the payment service is used in the course or furtherance of business, proper tax documentation is available, the credit is otherwise eligible and there is sufficient taxable output liability, the GST of Rs. 8.50 on MDR will be available as ITC. In that situation, the actual cost of MDR to the STS will be Rs. 47.20. In above case, STS being GST registered making taxable supplies, MDR is Rs. 47.20 and GST on it is Rs. 8.50, hence potential ITC will be Rs. 8.50, net economic cost will be Rs. 47.20, subject to eligibility and utilisation. On the other hand if merchant making exempt supplies, If the GST on the MDR is not fully creditable because of the nature of the merchant's supplies, then Rs. 8.50 may ....
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....become an actual cost, same in case of composition taxpayer and unregistered merchant. Relevance of Rs. 300 cap The framework provides that for transactions of Rs. 75,000 and above, MDR is capped at Rs. 300 per transaction. For example, STS Received Rs. 1,00,000 as a consultancy fees inclusive of GST, now MDR will be capped to Rs. 300 + Rs. 54 GST = Rs. 354 Therefore, after the Rs. 75,000 threshold, the effective MDR burden as a percentage of transaction value actually falls as transaction value increases. Accounting implications for businesses Businesses should ensure that their accounting systems separately capture gross UPI collections, MDR expense, GST charged on MDR, eligible ITC, net bank settlement, reconciliation w....
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....ith the payment service provider, and GST invoice or document for the MDR service. For example client paid STS Rs. 11,800, on which MDR is Rs. 47.20, and GST on MDR will be Rs. 8.50, So, the bank settlement will be Rs. 11,744.30, hence, the books should not simply record Rs. 11,744.30 as sales, rather the gross revenue or invoice value and payment-processing charges need to be separately accounted for. Conclusion The introduction of MDR represents a structural change in the economics of the UPI ecosystem. UPI has historically been associated with a zero-MDR model for P2M transactions, with the Government supporting the ecosystem through various measures. The new framework seeks to introduce charges for specified high-value merchant....
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.... transactions while retaining exemptions and concessional treatment for several categories, from a business perspective, the important issue is not merely whether MDR is 0.4%. The real question is What is the all-in cost of accepting the payment after MDR, GST on MDR, ITC availability and transaction caps are taken into account? Also, the GST on MDR is not GST charged again on the GST forming part of the customer's invoice, rather it is GST on a separate payment-processing service. *** Author can be contacted at [email protected] Authors note: A GST registered client came to me asking, "Aman, my most of the business payments are received through UPI", will I get ITC? What will be the treatment? So being a logical consul....
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....ting engagement, I researched on it. Hope you will find it useful =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....