Sarah Brady
Updated on: October 8, 2024 1:50 pm GMT
The Goods and Services Tax (GST) Council is poised to deliberate on a proposal to impose an 18% Goods and Services Tax on payment aggregators (PAs) for small digital transactions of up to ₹2,000. This discussion is set to occur during the Council’s upcoming meeting on September 9. Payment aggregators, which play a crucial role in facilitating online payments through debit and credit cards, may soon be subject to this new tax regime, as indicated by a report from CNBC TV18.
Implications of GST on Payment Aggregators
The GST Fitment Panel, composed of revenue officials from both the central and state governments, believes that payment aggregators operate as intermediaries for digital transactions. As such, they should not be classified alongside banks, which have a different regulatory framework. This shift in classification has led the Fitment Panel to recommend the implementation of GST on these entities.
Currently, payment aggregators are exempt from GST for transactions below ₹2,000, a rule established during the 2016 demonetization process. This exemption has been beneficial for small businesses, given that more than 80% of digital transactions in India fall under this value category. However, the proposed tax could alter this landscape significantly, especially for small enterprises that primarily rely on high volumes of low-value transactions.
Potential Impact on Small Businesses
Small businesses may face increased financial burdens if the GST Council moves forward with this proposal. Payment aggregators typically charge merchants transaction fees ranging from 0.5% to 2%. If the 18% GST is enforced, it is likely that these companies will pass the additional costs on to merchants, thereby increasing the overall expenses of conducting digital transactions.
For instance, consider a typical transaction of ₹1,000. Under the current payment gateway fee and without GST, a merchant would incur a charge of ₹10. However, if the proposed 18% GST is applied, the fee would rise to approximately ₹11.80, which, while seemingly modest per transaction, can lead to substantial cumulative costs for businesses that process numerous low-value transactions.
Broader Context of Digital Payments in India
Despite the looming tax ramifications, the digital payment landscape in India continues to thrive. The Unified Payments Interface (UPI) has emerged as the frontrunner for digital transactions, particularly for those under ₹2,000. UPI transactions witnessed impressive growth in the fiscal year 2024, with a 57% year-on-year increase, surpassing 131 billion transactions. UPI currently accounts for over 80% of total retail digital payments.
Importantly, the proposed GST would apply specifically to transactions conducted through debit and credit cards, leaving UPI transactions unaffected, as they do not incur a Merchant Discount Rate (MDR). This means that for small-value transactions, UPI remains a cost-effective solution for both merchants and consumers, further solidifying its popularity in the digital payments ecosystem.
Upcoming Discussions at the GST Council
The GST Council’s meeting on September 9 holds significant implications for various stakeholders in the digital payments landscape. With the potential for an 18% GST on payment aggregators being a hot topic, discussions are expected to explore the broader ramifications for small businesses and the digital economy.
Should the Council approve this proposal, it may set a precedent for further taxation policies affecting digital payment platforms and similar intermediaries. As South Asian economies increasingly pivot towards cashless transactions, the impact of such tax policies will be closely monitored.
Conclusion
The potential imposition of an 18% GST on payment aggregators for small transactions poses a considerable challenge, particularly for small businesses that rely heavily on these digital payment methods. As the GST Council prepares for its crucial meeting, the outcome will undoubtedly shape the future of digital transactions in India, impacting both merchants and customers in the evolving landscape of financial technology.
With all these changes happening, it’s important for everyone involved to keep up with what the Council decides. They should also get ready for possible changes in the costs of using digital payments.
