GST-registered merchants can claim input tax credit on GST paid on MDR, while issues surrounding merchant discount rates could be taken up by the GST Council.
Highlights
- The government said issues related to GST on Merchant Discount Rate (MDR) could be taken up by the GST Council.
- CBIC clarified that GST-registered merchants can claim full input tax credit (ITC) of GST paid on MDR.
- MDR is treated as a financial service and attracts 18% GST.
New Delhi: The GST Council may take up issues related to the Merchant Discount Rate (MDR), even as the Central Board of Indirect Taxes and Customs (CBIC) has clarified that GST-registered merchants will be allowed to claim full input tax credit on GST paid on MDR.
MDR is the fee associated with processing digital payment transactions. Since it is treated as a financial service, an 18% GST is applicable and the tax has to be paid to the bank.
According to a senior CBIC official cited in the report, GST charged by a bank on MDR collected from a merchant will be available to the merchant as Input Tax Credit (ITC). This means eligible businesses can use the credit to offset their final GST liability.
However, the facility will be available only to regular GST assessees. Merchants operating under the composition scheme and businesses that are not registered under GST will not be able to claim the credit.
The government has also indicated that if there are problems related to the MDR framework, a proposal could be considered at the GST Council meeting scheduled for October 7.
Tax experts believe the ITC mechanism could substantially reduce the effective burden on organised GST-registered businesses. For example, the 18% GST levied on MDR could pass through the credit chain for eligible merchants rather than becoming an additional final cost.
However, the impact will not be uniform. Unregistered merchants who cannot claim ITC would effectively have to absorb the GST component as an additional cost, potentially making digital payment acceptance more expensive for them.
There are also operational challenges. Payment transactions can involve several entities, including banks, payment aggregators and NPCI. Tax experts noted that invoice availability, GSTIN information and reporting mismatches across the payment chain could delay or disrupt merchants’ ability to claim ITC.
The clarification assumes significance as digital payments continue to expand and more merchants enter the formal GST system. Any further changes to the MDR framework will depend on deliberations and decisions of the GST Council.
