Your UPI payment just got a price tag: what it means for GST-registered taxpayers

From October 15, 2026, some shopkeepers and businesses will have to pay a fee to receive payments through the Unified Payments Interface (UPI). The National Payments Corporation of India (NPCI), which manages UPI, has brought in a merchant discount rate (MDR) of 0.4% on certain person-to-merchant UPI payments above Rs 2,000.

For payments of Rs 75,000 or more, the fee is capped at Rs 300 per transaction.

Small merchants get relief. Those in the prescribed P2PM (small merchant) category who receive up to Rs 1 lakh a month through UPI QR codes will still pay nothing.


The customer does not pay this fee. The merchant bears it and cannot pass it on to the customer separately.

This raises four practical questions:

•Will GST (goods and services tax) apply to the fee?

•How will the portions shared, among banks and apps be taxed?

•Does the merchant have to deduct tax at source (TDS)? and

•Can the fee be claimed as a business expense?

Who gets a slice of the 0.4%?

The fee does not go to a single company. The merchant deals only with its own bank, called the acquiring bank. That is the only party that bills the merchant. The acquiring bank then passes part of the fee to the customer’s bank (the issuing bank). The issuing bank passes a share to the sponsor bank of the UPI app. The sponsor bank then pays the app, such as Google Pay or PhonePe. NPCI runs the UPI system but is not one of the parties sharing the fee.

After all the passing along, each party ends up with the following share:

•The customer’s bank (issuing bank) keeps 40%

•The merchant’s bank (acquiring bank) keeps 30%

•The UPI app keeps 20%

•The app’s sponsor bank keeps 10%.

For example. A customer pays Rs 10,000 to a shop. The MDR of Rs 40 is deducted, and the shop receives Rs 9,960 before counting any GST on the fee.

Here is how the Rs 40 flows. The merchant’s bank collects the full Rs 40 and pays Rs 28 to the customer’s bank. The customer’s bank passes Rs 12 to the app’s sponsor bank, which pays Rs 8 to the app. In the end, the merchant’s bank keeps Rs 12, the customer’s bank Rs 16, the sponsor bank Rs 4, and the app Rs 8.

PaymentRs 5,000Rs 10,000Rs 50,000Rs 1,00,000

MDR chargedRs 20Rs 40Rs 200Rs 300 (capped)

Merchant receivesRs 4,980Rs 9,960Rs 49,800Rs 99,700

GST: Tax on the fee, but on how much?

The current indication is that GST at 18% will apply to the MDR, treated as a financial service under SAC 9971. It will apply to the MDR fee and not to the full amount paid to the merchant through UPI. A GST-registered merchant can claim input tax credit (ITC) on this GST, subject to the conditions in Section 16 of the CGST Act.

The tricky part is deciding what amount the GST is charged on. On a Rs 40 fee, 18% GST on the whole amount comes to Rs 7.20. If GST is charged only on the Rs 12 share of the merchant’s bank, it comes to just Rs 2.16. The answer depends on one question. Is the MDR payment for one combined service or for several separate services by different parties?

The courts have dealt with a similar question before under the erstwhile tax regime

This question first came up with credit cards under the old service tax law. In Commissioner of GST & Central Excise v. Citibank N.A., 24 Centax 164, the Supreme Court looked at a case where the acquiring bank had already paid service tax on the entire MDR. The tax department also wanted service tax on the interchange fee received by the issuing bank.

The court said no. It held that the MDR was payment for one unified service, covering the acquiring bank’s fee, the issuing bank’s interchange fee, and the platform fee. Since tax had already been paid on the full MDR, taxing the interchange fee again would mean taxing the same service twice. The CESTAT, Mumbai, followed this ruling in HDFC Bank Ltd. v. Commissioner of CGST & Central Excise, 45 Centax 338.

Why that ruling may not settle the GST question

The Citibank ruling is a useful guide, but it cannot simply be copied into GST. Under Article 141 of the Constitution, a Supreme Court ruling binds the law it interpreted. In this case, that law was Section 65(33a) of the Finance Act, 1994. That section specifically covered card payment services and expressly named issuing and acquiring banks.

GST has no matching provision. It works on the broader idea of “supply” under Section 7 of the CGST Act. GST also rests on a different constitutional base and a different taxable event, and it replaced several older taxes. So, each case must be examined afresh under GST. That means asking what the supply is, who supplies it, who receives it, and what the payment is for.

Two possible ways to look at it

Option 1: One service, one bill. The merchant’s bank collects the full MDR and charges GST on all of it. If the Citibank reasoning applies, the shares passed on to others would not be taxed again. That raises further questions. Are those shares a “supply” at all? If they are treated as exempt supplies, would the banks and apps have to reverse input tax credit under Section 17 of the CGST Act? If they are simply money passing through, would no reversal be needed?

This view runs into a CBIC FAQ on the Financial Sector dated 27-12-2018. That FAQ says card settlement fees between banks are a separate business-to-business transaction, taxable under GST, with credit available. However, an FAQ is only an administrative clarification. It does not carry the force of law or a court ruling.

Option 2: Separate services, separate bills. The merchant’s bank bills only its own share. The other shares are settled separately. Should the customer’s bank, the sponsor bank, and the app then each issue their own invoices? And to whom, since the merchant has privity of contract with its issuer bank or the sponsor bank and app? The answer decides whether the merchant claims credit on one invoice or several.

A related circular, but not a direct answer

CBIC Circular No. 228/22/2024-GST, dated 15-07-2024, dealt with incentives that acquiring banks share with issuer banks, payer PSPs, and UPI apps. These were paid under the government’s scheme promoting RuPay debit cards and low-value BHIM-UPI payments up to Rs 2,000. The circular said such sharing, done in the manner decided by NPCI, is a “subsidy” and not taxable under GST. That scheme is different from the new MDR, so the circular does not settle the present question.

Still waiting for clarity

Merchants and banks need official answers on four points:

•Is the MDR one service or several?

•Who should issue the tax invoice to the merchant?

•Is GST due on the full MDR or only on the merchant's bank's share?

•What credit can the merchant claim, and how is credit treated for the other parties?

The upcoming GST Council meeting is scheduled on 7 October 2026. Reports suggest the issue is not on the agenda, though the council could still take it up. With the fee starting on October 15, businesses may have to begin operating before any clarification arrives.

The author is Head-Customs and GST, Taxmann Research & Development. Views are personal