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UPI-MDR-GST: Indirect Taxation in Its Truest Form Adv. G. Jayaprakash Former Superintendent of Central Excise
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....PI-MDR-GST: Indirect Taxation in Its Truest Form Adv. G. Jayaprakash Former Superintendent of Central Excise<br>By: - Jayaprakash Gopinathan<br>Goods and Services Tax - GST<br>Dated:- 22-9-2026<br>The possible introduction of a Merchant Discount Rate (MDR) on specified UPI transactions from 15 October 2026 has generated technical discussion. The precise legal position will depend on the applicable notifications, payment-system rules, transaction limits, and the terms agreed between merchants, banks and payment-service providers. If MDR is imposed, it would ordinarily be collected from the merchant or deducted from the amount settled to the merchant; that does not necessarily mean that the customer will be charged a separate fee. Consider....
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.... a customer making a UPI payment of Rs. 50,000. If the applicable MDR is 0.4 per cent, the MDR would be Rs. 200. If GST at 18 per cent is legally chargeable on that MDR or on the relevant payment-processing service, the GST would be Rs. 36. The merchant would then receive Rs. 49,764, assuming that the charge is calculated in this manner and that no other fees, caps, subsidies or contractual adjustments apply. The calculation is therefore illustrative, not a statement of the rate or tax treatment that will necessarily apply in every case. The applicable GST rate, taxable value, place-of-supply rules, liability to pay tax and availability of any exemption would have to be determined under the relevant law and notifications in force at the ....
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....time. The GST of Rs. 36 would not ordinarily be GST on the Rs. 50,000 transferred through UPI. It would be GST on a separate service, such as payment-processing or acquiring services, supplied to the merchant or to another relevant recipient under the contractual arrangement. Whether the service is supplied by a bank, payment aggregator or another payment-service provider, and who is liable for GST, would depend on the actual contractual and regulatory structure. Accordingly, describing the amount as "GST on GST" would generally be inaccurate, although the commercial effect may still be that the merchant pays both the MDR and the GST charged on the service. The economic question is who ultimately bears that cost. An MDR deducted from ....
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....the merchant's settlement is initially a cost of the merchant. The merchant may absorb it, recover it through prices or other commercial terms, or negotiate its allocation with the payment provider. Whether and to what extent it is passed on to customers cannot be stated as a legal certainty. It will depend on competition, margins, customer demand, contractual restrictions and the merchant's pricing policy. For GST purposes, the MDR itself is consideration for a service and is not normally an input tax credit. GST charged on that service may be available as input tax credit to a registered person, but only if the statutory conditions are satisfied. These conditions may include possession of a valid tax document, receipt of the se....
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....rvice, use in the course or furtherance of business, reporting and payment requirements, and compliance with the restrictions and time limits under the CGST Act and Rules. The credit may also be restricted or unavailable where the service relates to exempt supplies, non-business use or other blocked categories. A composition taxpayer cannot generally claim input tax credit. An unregistered person cannot claim it either. A person making exempt supplies may be unable to use credit to the extent attributable to those supplies, subject to the applicable apportionment rules. In such cases, the MDR and any GST that cannot be recovered as credit may constitute a business cost. For a regular taxpayer making eligible taxable supplies, however, th....
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....e GST component may be creditable and should not automatically be described as an irrecoverable cost. The tax treatment may also differ depending on whether the payment service is covered by a specific exemption or special arrangement. In particular, the existence of an MDR does not by itself establish that GST is payable at 18 per cent in every transaction. The relevant exemption notifications, rate notifications and contractual facts must be examined before reaching that conclusion. An MDR could nevertheless influence commercial behaviour. Some businesses may seek to renegotiate payment charges, limit acceptance of particular payment instruments where legally permissible, alter discounts or incorporate payment costs into general pri....
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....cing. These are possible economic responses, not inevitable consequences. Any refusal to accept UPI or any surcharge imposed on customers would also have to comply with applicable payment-system directions, consumer-protection requirements and other law. The statement that "the customer will not be charged" should therefore be understood narrowly. It may mean that no separate MDR is debited from the customer's bank account and that the customer pays the displayed transaction amount. It does not guarantee that the merchant will absorb the cost permanently or that the cost will never influence prices. At the same time, it is not legally correct to assume that every merchant will necessarily pass the full amount to every customer. Th....
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....e merchant is the person from whom the charge may initially be collected, but the ultimate economic incidence is not fixed by the method of collection. Depending on market conditions, the burden may be borne wholly or partly by the merchant, shared with payment intermediaries, or passed on to customers through prices or reduced discounts. The GST component may also be recoverable as input tax credit for eligible registered taxpayers. MDR, if introduced, would therefore be a payment-processing charge rather than a tax merely because it is collected through the payment system. GST on the underlying service would be an indirect tax, but its final economic incidence cannot be determined solely from the fact that the merchant is charged. The ....
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....more accurate conclusion is that the measure may create a cost for merchants and may, in some circumstances, affect consumer prices, while the legal tax treatment and ultimate burden depend on the applicable notifications, contractual arrangements and the merchant's eligibility for input tax credit. =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....