Sarah Brady
Updated on: October 8, 2024 3:20 pm GMT
The Goods and Services Tax (GST) Council is set to meet on September 9 to discuss the potential imposition of an 18% GST on payment aggregators (PAs) for small transactions valued up to Rs 2,000. Payment aggregator companies like BillDesk and CCAvenue, which currently do not pay GST on these low-value transactions, could see significant changes as a result of this proposal. The decision emerges from discussions by the GST Fitment Panel, which suggests that payment aggregators should be classified as intermediaries rather than banks.
Background on Payment Aggregators and Current Taxation
Payment aggregators play a crucial role in facilitating digital transactions in India, acting as intermediaries between merchants and customers. Under the existing framework, transactions below Rs 2,000 are exempt from GST, which has contributed to their prevalence—over 80% of digital payments in the country fall under this category.
The waiver was initially implemented as part of a government notification during the demonetisation period in 2016. However, with changes in the taxation landscape following the introduction of the GST regime, authorities have begun evaluating the applicability of taxes since fiscal year 2017-18.
Potential Impact of the Proposed GST
The proposed 18% GST on small transactions could lead to a revision of costs for merchants reliant on these payment aggregators. Currently, PAs charge merchants a fee ranging from 0.5% to 2% per transaction. Should the GST be enacted, these operators may either absorb the additional tax or pass it on to merchants, potentially affecting small businesses that frequently process low-value transactions.
To provide an example, consider a Rs 1,000 transaction with a current payment gateway fee of 1%. This incurs a cost of Rs 10 to the merchant. With the new tax, this total could rise to Rs 11.80, marking a modest increase that may nonetheless accumulate significantly across numerous transactions.
UPI’s Role in the Payment Landscape
Despite the possible taxation on payment aggregators, the Unified Payments Interface (UPI) remains unaffected by these changes. UPI has established itself as the leading method for digital payments in India, particularly for small transactions. In fiscal year 2024, UPI reported a 57% year-over-year growth, resulting in over 131 billion transactions and constituting more than 80% of total retail digital payments in the country.
One key aspect that differentiates UPI transactions from those handled by payment aggregators is that UPI does not impose a Merchant Discount Rate (MDR). As a result, UPI continues to be a cost-effective payment option for both merchants and consumers, preserving its appeal despite the ongoing discussions regarding GST on aggregators.
Implications for Small Businesses
While the proposed taxation is primarily aimed at payment aggregators dealing with credit and debit card transactions, small businesses that thrive on these low-value transactions may face urgent financial considerations. The impact on high-value transaction merchants should be minimal, but businesses frequently processing smaller amounts could experience a strain as operational costs potentially rise.
The GST Council’s deliberation on this matter underscores the evolving landscape of digital transactions in India and the importance of ensuring that tax regulations keep pace with technological advancements.
Next Steps for the GST Council
The upcoming GST Council meeting will be pivotal in shaping the final decision regarding the proposed 18% GST on payment aggregators. Stakeholders from various sectors are closely watching the developments, given the significant role that digital payment platforms play in the contemporary economic environment.
Expectations are high for clarity surrounding the classification of payment aggregators and their tax liabilities. As the Council assesses these facets, the implications of their decisions will likely reverberate through the business community, specifically among small businesses reliant on low-value transactions.
Digital payments are getting more popular, especially with UPI. It’s not clear yet how new rules will affect how people use these payment methods in the next few months.
