18% GST on Small-Value Digital Payment Aggregator Income

Nitin Konde, Apoorva Bajj

Sep 7, 2024 — 3 min read

18% GST on Small-Value Digital Payment Aggregator Income

According to media reports, the GST Council might take into consideration a plan to charge payment aggregators (PAs) 18% GST for digital transactions with a minor value of up to INR 2,000 that are made through debit and credit cards during their upcoming meeting.

Following the overnight demonetization of 500 and 1,000 rupee notes in 2016, the government implemented measures to enhance digital payment systems. The service tax was not applied to debit and credit card transactions that were less than INR 2,000, which was a crucial step. To aid in the country's transformation to a digitally empowered economy, this measure sought to encourage more individuals to switch from paying with cash to using cards. This occurred in December 2016, far before the Goods and Services Tax was implemented in July 2017.

Updated Plan: Goods and Services Tax for Payment Aggregators

Now, according to updated information circling, the GST Council is considering what amounts to a major shift. When it comes to fees charged by payment aggregators for debit and credit card transactions, they might think about implementing an 18% GST. Such costs for transactions below INR 2,000 have previously not been applied.

The standard range for payment gateway fees is 0.5% to 2% per transaction, with the majority charging approximately 1%. Payment aggregators will most likely charge merchants the new GST on top of these fees.

"If this tax is imposed, it will hurt small businesses which generally have low-value transactions..." said a prominent fintech executive in the payments field, speaking to a renowned media house. The payment processors will simply forward the information to the companies and vendors.

The Absence of the UPI

There may not be much of an effect on digital transactions as a whole because UPI is already the most used digital payment method, particularly for transactions with low values. The volume of transactions processed by UPI surpassed 131 billion in FY24, an increase of 57% year-over-year.

More than 80% of all digital payments made in India's retail sector currently go through UPI. Keep in mind that this GST is exclusive to online purchases paid for using a credit or debit card. The fee will not impact Unified Payments Interface (UPI) transactions because there is currently no Merchant Discount Rate (MDR). As a result, UPI continues to be an appealing payment option for both customers and retailers for transactions up to INR 2,000, as it does not incur any fees.

Effects on Small Companies

The additional 18% tax on payment gateway fees would not be too much of a problem for retailers who deal in high-value transactions. However, this can have a more noticeable effect on small enterprises that deal in frequent low-value transactions.

Picture this: the merchant pays INR 10 for a 1% payment gateway fee, on top of the 1,000 transaction. This is how the present system works. This price would grow to INR 11.80 after the planned GST—a small increase, but one that can build up rapidly over hundreds of transactions.

Way Forward

The disparity in tax treatment between UPI and debit/credit cards can cause shoppers and businesses to reevaluate their preferences, especially as UPI transactions continue to grow in popularity owing to their zero-cost nature. To keep digital payments everywhere accessible and reasonable, we'll need to strike a balance.