The GST Council has deferred two proposals concerning input tax credit (ITC) and taken up a proposal to reduce the GST rate on Merchant Discount Rate (MDR) for UPI transactions. The Council has approved the other proposals listed on its agenda.
One of the deferred proposals seeks to amend Section 16(2) of the GST Act, which lays down the conditions taxpayers must fulfil to claim ITC. The proposal has been referred to a Group of Ministers for further examination.
A key requirement under Section 16(2) is that the tax charged on a supply must have been paid to the government. The proposed amendment was intended to address difficulties faced by genuine taxpayers when suppliers fail to deposit the tax.
However, concerns remain over the possibility of fake billing, fraudulent invoices and wrongful ITC claims. The Council has therefore decided that the issue requires a more detailed review before any change is approved.
The Council also deferred a proposal to permit ITC claims on motor vehicles under Section 17(5). The provision currently restricts credit on specified goods and services, including certain motor vehicles, while allowing prescribed exceptions.
If approved, the proposed relaxation would have expanded the circumstances in which businesses could claim credit on motor vehicles. The deferment means that businesses will have to wait for further clarity on whether the existing restrictions will be eased and in what form.
Proposal to cut GST on UPI MDR considered
The Council has also considered reducing the GST on UPI MDR from the existing 18% to 5%. Most states raised concerns about the current levy, particularly in view of the new MDR framework that is expected to introduce charges on specified higher-value merchant transactions.
Under the proposed framework, an MDR of 0.4% will apply to specified person-to-merchant UPI transactions above Rs 2,000, subject to certain caps and exemptions. The government expects around 96% of person-to-merchant UPI transactions to remain unaffected.
GST is currently charged at 18% on MDR. GST-registered businesses can claim this amount as input credit, but merchants unable to claim ITC have raised concerns about the additional cost.
The proposed reduction to 5% is being considered as the government works to limit the additional tax burden linked to the introduction of MDR on eligible UPI transactions.
The timing of the new MDR framework also remains uncertain. Its rollout was initially scheduled for October 15 but is now likely to be deferred to January 1, 2027. The framework itself is not proposed to undergo any change.
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