GST on UPI Transactions 2025

APR 2025 : UPI has grown to be an intrinsic element of the Indian financial system, being the easiest, instant, and secure way to transfer funds among users. The Unified Payments Interface was developed by the National Payment Corporation of India (NPCI), which merges multiple bank accounts into a single mobile application, thereby making everything from bill payments to peer-to-peer money transfers easy and accessible.

With increasing usage of Unified Payments Interface among individual users, small businesses, and even large enterprises, the issues regarding its applicability under Goods and Services Tax (GST) have become pertinent discussions. Many have queries on whether simply making or receiving payments through Unified Payments Interface brings GST liability or whether there is any implication for merchants and service providers.

Understanding GST in the Context

The Goods and Services Tax is an indirect tax that currently applies to every supply of goods and services in India. It is levied at different rates according to the goods or services supplied.

UPI being a payment method, it can definitely not be termed as a product or service sold. The tax implication depends on the use of UPI transactions. GST applicability will depend on the nature of the underlying transaction.

Is GST Levied on UPI Transactions?

In the first place, there is no GST applicable to a Unified Payments Interface transaction. Just because payment happens via Unified Payments Interface, the government cannot charge a tax. But if the payment was made for a taxable good or service, then GST will always be there on the transaction-regardless of whether it was paid for in cash, by credit card, or through UPI.

When GST Applies in a UPI Transaction:

• UPI is a medium through which goods or services are purchased, thereby attracting GST according to the item or service purchased. 
• Payment for digital services or subscriptions through UPI means that GST is included in the price.
•  Purchase from business establishments via UPI should be properly recorded to claim Input Tax Credit (ITC).

When GST Does Not Apply:

• Personal transfers (e.g., sending money to a friend or family member).
• Non-commercial peer-to-peer (P2P) UPI payments.
• Fund transfers not involving the sale of goods or services.

Role of Banks and App Providers in GST Collection

Banks, payment gateways, and UPI app developers are among the entities that could provide value-added services on which they would charge a fee. These services can comprise merchant onboarding, analytics, transaction report generation, and customer support.

Whenever service providers levy a charge, they are assessed 18% of GST on that charge.

For example:

• A taxable supply will arise when a bank charges the merchant for API integration or technical support.
•  App developers providing customized UPI features for merchants would also have to charge GST on the services rendered.

Merchant Discount Rate (MDR) and Its GST Status

The Merchant Discount Rate (MDR) is a charge levied on merchants for accepting digital payments from customers, but transactions using UPI or RuPay cards up to the amount of ₹2,000 were made exempt from the charges as notified by the government.

That said:

• MDR may be applicable for transactions above rupee two thousand or bundled services.
• If MDR or any other fee for service is charged, then GST is levied on the said fee.

Businesses need to ascertain if their payment solution providers realize GST in any of the charges levied on them, and include it accordingly in tax submissions.

UPI and Input Tax Credit (ITC) for Businesses

All businesses that accept money through UPI as payment for the purchase can claim GST input credit, provided the payment is made for a taxable supply and is accompanied by adequate documentation.

How to Claim ITC with UPI Transactions:

1. The seller is required to issue a GST invoice along with their GSTIN number and breakup of GST. 
2. The buyer shall maintain a record of the UPI transaction, possibly synced with the accounting software. 
3. Ensure that the seller uploads the invoice details to their GSTR-1; otherwise, the buyer cannot claim ITC in GSTR-2B.

Concerning goods that are used for their business, a business may be involved in transactions falling under RCM.

GST on UPI-Based Incentives, Cashback, and Rewards

Cashback campaigns and product-specific reward programs have also become a very common occurrence across UPI apps to promote the use of various benefits available on them. The above could raise tax-related queries for businesses as well as those.

• Cashback received through UPI is not subject to taxation for individual users. 
• On the other hand, some promotional incentives received may constitute income or service compensation, which may be liable to GST or income tax based on the array.
•  In situations where a business is providing promotional services to earn the reward, such transactions could be subjected to GST on the basis that it amounts to providing promotional services.

Cross-Border UPI Transactions and GST

With India’s footprint of UPI expanded internationally for transactions in countries such as Singapore and the UAE, the following is applicable regarding GST on international UPI payments:

• Remittances not for personal use have traditionally been exempt from GST.
• International payments made for trade, especially for goods or services, are likely to cover Integrated GST (IGST).
• The GST treatment will depend on the place of the final determination for cross-border determination under GST law.
• Internationally remittances received are not subject to GST. International payments for business purposes – especially for goods or services – are likely to fall under Integrated Goods and Services Tax (IGST). GST treatment will, however, depend on place of supply-which is the basic determinant under GST law for cross-border transactions.

Proper classification of cross-border UPI transactions is critical to avoid any legal complications.

Government Support and GST Relief for UPI Usage

The government of India has initiated various schemes to encourage a digital economy, such as: 

• UPI as a payment mode is exempted from all GST charges: The zero MDR on UPI payments below ₹2,000. 
• The government has, however, extended benefits to small and medium enterprises (SMEs) in the adoption of UPI by considerably reducing the financial burden that is incurred for compliance.

However, it must ensure that they are registered under GST and comply with the regular process of filing and record-keeping for GST if merchants accept payments via UPI.

Challenges and Considerations for GST on UPI Transactions

• Even if the taxation status of UPI is not a grey area, some remain: 
• Little awareness among small businesses and their owners. 
• Confusion with the method of payment versus the nature of the supply. 
• Poor maintenance of records for UPI payments for business use. 
• Cashback is being wrongly treated as taxable income without regard to the facts.

To mitigate risks, businesses must ensure they:

• Follow the correct accounting procedure. 
• Keep the correct record of all transactions. 
• Repeatedly seek the opinion of tax consultants or GST experts.

Conclusion

Simply put, UPI attracts no taxation under GST because it is a payment mechanism and not a taxable service. However, if goods or services are paid for through UPI, they attract GST as per the general rules of the underlying transaction. Individuals and, more importantly, businesses must understand the differentiating line between a means of payment vis-à-vis the nature of the transaction.

The importance of proper paperwork, invoice management, and clear business transactions cannot be overemphasized. They ensure full compliance with all the GST laws. As the payment mechanism, UPI is well on its way to covering the entire India. Now, one needs to keep all these tax implications in mind.

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