The government clarified that only GST-registered merchants can claim tax credits on digital payment fees. Unregistered businesses face an 18% cost burden, prompting potential discussions for relief at the upcoming October 7 GST Council meeting.
The central government recently provided a clarification regarding the 18% GST levied on Merchant Discount Rates (MDR). MDR is the fee that merchants pay to banks or payment processors for accepting card or digital payments. For large and mid-sized businesses already registered under the Goods and Services Tax (GST) framework, this tax is largely manageable. The government confirmed that these registered entities can claim Input Tax Credit (ITC) on the 18% GST paid on MDR. This mechanism effectively makes the tax a pass-through cost, ensuring it does not become an extra expense on their balance sheets.
However, the clarification highlights a structural problem for smaller, unregistered merchants and those operating under the composition scheme. These entities do not have the facility to claim input tax credits. Consequently, the 18% GST charged on payment processing fees becomes an additional, non-recoverable operating cost for them. This creates a cost disparity, where smaller vendors may feel a direct financial pinch when opting for digital payments compared to larger, GST-registered competitors.
The digital payments ecosystem—which includes banks, payment aggregators, and the National Payments Corporation of India—is complex. Beyond the tax burden, tax experts point out that the process of claiming credit is not always seamless. Even for eligible businesses, the availability of credit depends on accurate invoicing and reconciliation between the bank, the payment aggregator, and the merchant. Any mismatch in reporting can lead to delays or the denial of credit, adding to the operational burden of managing digital transactions.
With concerns growing over whether these tax costs discourage small merchants from adopting digital payments, industry representatives are looking toward the GST Council. While the government has not officially confirmed that this specific relief will be on the agenda, the Council has the authority to introduce policy changes that could extend relief to a broader category of merchants. Investors and stakeholders are now watching the upcoming GST Council meeting scheduled for October 7 to see if any policy adjustments are introduced to harmonize the tax impact across all sizes of merchants. The focus remains on whether the government will prioritize ease of doing business for smaller, unregistered players to maintain the momentum of the digital payment economy.