GST on Card Payments Below Rs 2,000

GST on card payment below 2000 transaction to push small merchant towards UPI payment

The Indian government’s decision to impose a Goods and Services Tax (GST) on card payments below Rs 2,000 is set to have a significant impact on small merchants and their choice of payment methods. This move is likely to push more merchants towards Unified Payments Interface (UPI) due to its cost-effectiveness and ease of use. In this article, we will explore the implications of this policy, its impact on small businesses, and why UPI is becoming the preferred choice for transactions under Rs 2,000.

Introduction

The imposition of GST on card payments below Rs 2,000 has been a recent development in India’s evolving financial landscape. This decision affects both debit and credit card transactions, making them slightly more expensive for merchants. Small business owners, already operating on thin margins, are likely to reconsider their payment options. The GST on these transactions is currently set at 18%, adding an extra layer of cost for merchants accepting card payments. As a result, many small merchants are expected to gravitate towards UPI, which remains free of such charges for low-value transactions.

Impact of GST on Card Payments

Card payments have been a popular mode of transaction, especially for amounts below Rs 2,000. However, the introduction of GST on these transactions has sparked concerns among merchants. An 18% GST on the service fee charged by banks for processing card payments increases the overall cost for merchants. For example, if a merchant sells a product for Rs 1,000 and accepts payment via card, the service fee might be around Rs 20. With an 18% GST, this fee would rise to Rs 23.60. While this may seem minimal, for businesses with high transaction volumes, these costs add up quickly, eroding profit margins.

The GST charge on card payments is seen as a deterrent for both merchants and consumers. For merchants, the additional cost may not justify the convenience that card payments offer. Meanwhile, consumers might prefer other payment methods that do not incur additional charges, indirectly affecting the merchants’ sales. This is especially true for small businesses that cater to cost-sensitive customers.

Why UPI is Becoming the Preferred Choice

Unified Payments Interface (UPI) has emerged as a game-changer in the Indian payments ecosystem. UPI transactions are not only seamless but also cost-effective for both merchants and consumers. The National Payments Corporation of India (NPCI), which operates UPI, has ensured that transactions under Rs 2,000 remain free of charge. This is a significant advantage over card payments that now attract GST.

The simplicity and widespread adoption of UPI make it an attractive option for small merchants. UPI allows for instant payments directly from the customer’s bank account to the merchant’s bank account. There are no intermediaries, no waiting periods, and most importantly, no transaction fees for low-value transactions. This direct transfer mechanism is particularly beneficial for small merchants who can avoid the costs associated with card payment infrastructure, such as POS terminals and the GST on transaction fees.

Data Supporting UPI’s Dominance

The data supports the shift towards UPI in light of the new GST charges on card payments. According to the NPCI, UPI transactions have grown exponentially, reaching over 9 billion transactions per month as of August 2024. This rapid growth has been driven largely by small-value transactions, with a significant portion of UPI transactions falling below the Rs 2,000 threshold. The ease of use and cost-effectiveness of UPI are primary factors contributing to this trend.

Moreover, the share of card payments in small-value transactions has been declining. The Reserve Bank of India (RBI) reported a 15% year-on-year decrease in the number of transactions made through cards for amounts below Rs 2,000 in the last fiscal year. On the other hand, UPI saw a 25% increase in transactions within the same value range. These figures highlight the growing preference for UPI among both merchants and consumers.

Small Merchants: Challenges and Opportunities

For small merchants, the imposition of GST on card payments poses both challenges and opportunities. The main challenge lies in the increased cost burden. However, this also presents an opportunity to adopt UPI, which not only eliminates transaction fees for amounts below Rs 2,000 but also offers a streamlined, secure, and quick payment process.

Adopting UPI can lead to significant savings for small merchants. For instance, a small shop that processes 100 transactions a day, each worth around Rs 1,000, would save approximately Rs 360 per day by switching from card payments to UPI. This translates to savings of over Rs 10,000 per month, a substantial amount for a small business.

Furthermore, UPI’s integration capabilities with various digital wallets, QR codes, and mobile apps provide small merchants with multiple avenues to receive payments, enhancing their operational efficiency. These features not only reduce costs but also improve customer experience by offering them convenient payment options.

Government and Regulatory Support for UPI

The Indian government and regulatory bodies have been actively promoting digital payments and UPI as part of their financial inclusion initiatives. The “Digital India” campaign has focused on reducing cash transactions and encouraging digital modes of payment. UPI’s low-cost structure aligns perfectly with these objectives, making it the favored platform for government-backed payment systems.

Additionally, the RBI has set up frameworks to ensure the security and smooth functioning of UPI transactions. The recent enhancements in UPI 2.0 and UPI Lite aim to further boost transaction volumes by introducing features like overdraft facilities, pre-authorized payments, and offline transactions, all of which are likely to attract even more merchants towards UPI.

Conclusion

The imposition of GST on card payments below Rs 2,000 is expected to push small merchants more towards UPI. With its cost-effective, easy-to-use, and rapidly growing platform, UPI offers a practical solution for small merchants looking to minimize costs and streamline their payment processes. The shift towards UPI is supported by data showing a decline in card transactions and a corresponding rise in UPI usage for small-value payments.

As UPI continues to evolve with enhanced features and regulatory support, it is poised to become the dominant payment method in India, especially for small-value transactions. Small merchants, by adopting UPI, can not only avoid the added GST costs associated with card payments but also tap into a broader customer base that prefers digital, hassle-free payment options. The future of payments in India, particularly for small businesses, is likely to be driven by UPI, offering a win-win solution for both merchants and consumers.