The GST Council is expected to discuss a proposal to impose an 18% Goods and Services Tax (GST) on payment aggregators (PAs) for facilitating small-value digital transactions, specifically those under ₹2,000 made via debit and credit cards.
Background: Service Tax Waiver Post-Demonetisation
Following the 2016 demonetisation, when ₹500 and ₹1,000 currency notes were withdrawn from circulation, the government introduced measures to encourage digital payments. A key initiative was waiving the service tax on debit and credit card transactions under ₹2,000 to promote cashless transactions and aid in the country’s digital transformation. This exemption was introduced in December 2016, just before the implementation of GST in July 2017.
The Proposed Change: GST on Payment Aggregator Fees
Now, the GST Council is considering a significant shift. According to report, it may impose an 18% GST on the fees charged by payment aggregators for processing transactions via debit and credit cards. Currently, such fees on transactions under ₹2,000 are exempt from tax.
Payment gateways typically charge a fee ranging from 0.5% to 2% per transaction, with an average of around 1%. The new GST would be applied to these fees, which payment aggregators are expected to pass on to merchants.
The UPI Exemption
Unified Payments Interface (UPI), currently the most widely used form of digital payment in India, especially for small-value transactions, will not be affected by the new tax. In FY24, UPI recorded a remarkable 57% year-on-year growth in transaction volume, with over 131 billion transactions.
UPI now handles over 80% of India’s retail digital payments. It’s important to highlight that the proposed 18% GST applies only to digital transactions processed through debit and credit cards. UPI transactions, which do not incur a Merchant Discount Rate (MDR), will remain exempt from the tax. For transactions up to ₹2,000, UPI continues to be a no-cost option for both merchants and consumers, reinforcing its status as a preferred payment method.
Impact on Small Businesses
While merchants handling high-value transactions may not feel a significant financial impact from the additional 18% tax on payment gateway fees, small businesses that process frequent low-value transactions could be more affected.
For instance, consider a transaction of ₹1,000: under the current system, a 1% payment gateway fee would result in the merchant paying ₹10. With the new GST, this fee would increase to ₹11.80—a seemingly small rise, but one that could accumulate quickly across multiple transactions.
What this means for payment aggregators and merchants
Payment aggregators, which facilitate digital transactions for businesses, are expected to transfer this new tax burden to their clients, the merchants. This practice is common when taxes or operational costs increase in an industry. The concern is that small businesses, which often operate on narrow margins, may find it difficult to absorb these additional costs. In turn, card payments might become a less attractive payment option, and merchants may eventually pass on the increased costs to consumers.
The Road Ahead: Finding Balance
With UPI continuing to rise in popularity due to its zero-cost structure, the differing tax treatment between debit/credit cards and UPI could further influence consumer and merchant preferences. Ensuring that digital payments remain accessible and affordable will require a careful balance as this new tax policy is considered.
Conclusion
The proposed 18% GST on payment aggregator fees for small-value digital transactions could have significant implications for small businesses and merchants. While UPI transactions remain unaffected and continue to be a cost-free option, the new tax might shift the financial burden onto merchants, particularly those dealing with low-value transactions. Balancing this policy change with the need to maintain affordable and accessible digital payment options will be crucial as the GST Council moves forward with its considerations.
