MC EXCLUSIVE Banks recommend new GST slab of Rs 1 crore to curb merchants ditching digital payments

DFS in talks with RBI, NPCI and Banks on GST and MDR slabs.

The department of financial services (DFS), in the last few months, has sought comments on the existing Goods and Services Tax (GST) slab for filing the tax returns from banks, the Reserve Bank of India and the National Payments Corporation of India with some lenders suggesting higher annual turnover threshold for merchants, according to three banking sources aware of the matter.

The deliberations over the last couple of months have been extensive and ongoing among various stakeholders. The data and feedback are also likely to be used for a possible implementation of a merchant discount rate (MDR) for merchant UPI transactions, the sources said. MDR is the commission that payment companies impose on merchants to pay for the cost of facilitating digital payments.

The move comes in the wake of the Karnataka Commercial Tax department sending notices to merchants with an annual turnover of over Rs 40 lakh. This turnover was calculated on the basis of the value of UPI transactions.

This prompted several merchants to ditch digital payments in favour of cash, with many in the banking circles seeing this as counterproductive to the country’s aim to formalise business payments.

After the government subsidies were reduced earlier this year, payment companies have been requesting the finance ministry to implement MDR for UPI payments.

According to these sources, it is learnt that the financial institutions recommended
raising the slab to Rs 1 crore annual turnover for GST filing as well as MDR for making compliance easier. Also, raising the MDR to Rs 1 crore will help smaller merchants to accept UPI payments.

“Why should businesses not be registered under GST, it is only for registration purposes. They do not have to pay taxes, so why should they hesitate? It is only for registration. But probably the idea would be to reduce the compliance, registration also becomes a kind of compliance burden. The idea would be why to bother small businesses, the move would be like reducing the compliance burden for them,” a senior government official with the finance ministry told Moneycontrol.

As per the current GST ruling, merchants who have an annual turnover of above Rs 40 lakh for goods and Rs 20 lakh for services should register themselves on the GST portal and file returns annually.

"DFS wanted to know what the banks think about existing slabs and whether these need to be raised as part of a periodical review,” said a banker whose institution received the DFS communication.

DFS also requested data from banks, RBI and NPCI on how many merchants in the country have an annual turnover above Rs 20 lakh based on banking data such as current accounts. Meanwhile, last month, RBI had also sought details from banks on the cost of running UPI.

“DFS does this survey every year in some form or manner. It is not clear whether the feedback will be implemented as these are largely political issues,” said a senior banker.

To be sure, the GST issue comes under the purview of the GST Council and Department of Revenue and is not the domain of DFS. However, the latter is the nodal department for interacting with the financial institutions.

DFS did not respond to Moneycontrol's request for comments or details on this issue.

“These offline retail establishments work with a margin ranging from 5-10 percent, which will translate into Rs 10 lakh annual income for the merchants. People with income below Rs 10 lakh are not required to pay income tax as per the new tax regime and hence applying the same logic to merchants, the GST requirement should be waived off for this section too,” said one of the bankers, who sent such a recommendation.

Over the last few years, UPI has become the most popular payment method for customers and merchants, including in smaller towns and rural areas. There are an estimated 35 crore merchant UPI QR codes, although they are not unique.

The spectre of MDR and GST compliance could force them to move back to cash. Around 64 percent of the nearly 20 billion UPI transactions are happening at merchant establishments.

“You do not want this issue to force merchants away from digital payments. All the efforts over the last five years will be wasted,” said the third senior banker.