GST on Online Transactions: The Goods and Services Tax (GST) Council recently held discussions on a proposal that could impact small online payments across India. During the meeting, the possibility of imposing an 18% GST on income generated by payment aggregators for transactions below ₹2,000 came under review. However, the Council did not reach a final decision. Instead, it referred the issue to the GST fitment committee for further analysis. Let’s dive into what this means for businesses and consumers.
GST on Online Transactions: Why the Proposal Matters ?
More than 80% of India’s digital transactions fall below ₹2,000. Small digital payments have seen explosive growth in the past few years, with more people shifting to online methods for everyday purchases. From buying groceries to paying utility bills, digital payments have become the norm. Payment aggregators play a key role by facilitating these transactions through QR codes, POS machines, and online banking. They currently charge merchants between 0.5% and 2% per transaction but do not levy GST on transactions below ₹2,000. This exemption has provided relief to small merchants and businesses.
If the government imposes an 18% GST on these transactions, the added cost may be passed on to merchants. This change could increase expenses for small businesses relying on low-value digital payments. Moreover, it may cause payment aggregators to revise their pricing structures. The GST Council aims to further assess these concerns by involving the fitment committee, which will examine the impact and provide recommendations.
Impact on Small Businesses
Small businesses make up a large portion of the market for low-value digital payments. These businesses, already dealing with tight profit margins, may face additional financial pressure if the proposed GST gets implemented. Currently, merchants benefit from relatively low fees on digital payments, but adding an 18% GST could raise operational costs. For example, a merchant who processes many sub-₹2,000 transactions daily might see a significant increase in monthly fees if payment aggregators pass the tax burden onto them.
The change could also lead some merchants to rethink their approach to accepting digital payments. While digital transactions provide convenience and transparency, the added tax could make them less appealing compared to cash payments. In this scenario, the ease of digital payments might be overshadowed by higher costs, forcing businesses to make tough decisions regarding their payment options.
Revisiting Tax Exemptions
The proposed GST on sub-₹2,000 transactions revisits an exemption granted during the 2016 demonetization period. At the time, the government exempted payment aggregators from charging tax on small digital transactions to promote cashless payments. The decision helped India’s digital payment ecosystem grow. However, the authorities are now reconsidering the long-term implications of this exemption.
Retrospective tax collection starting from the fiscal year 2017-18 could further complicate matters. Payment aggregators and merchants might have to pay additional taxes for previous transactions, adding to the burden. As the government reevaluates these tax policies, stakeholders are left to consider how it could shape the future of digital payments.
The Role of Payment Aggregators
Payment aggregators, such as Razorpay, Paytm, and others, act as intermediaries between merchants and customers. They simplify the process of digital payments by offering various methods, including UPI, debit/credit cards, and net banking. Without payment aggregators, the entire process of accepting digital payments would be far more complex for small businesses. Read more SpaceX’s Ambitious Mars Mission: The Next Frontier for Humanity
However, their services come at a cost. Even though they do not currently charge GST on transactions below ₹2,000, they do charge a percentage fee based on the transaction value. Should the GST Council decide to impose an additional 18% tax on this income, these platforms may be forced to raise their rates, passing the cost on to merchants and, indirectly, consumers. The increase in fees could discourage merchants from continuing to accept small digital payments.
What Happens Next?
The GST fitment committee has been tasked with analyzing the potential impact of this proposal. It will assess the economic burden on small businesses, consumers, and payment aggregators. Additionally, it will evaluate how this change might affect the overall digital payment ecosystem. Once the committee completes its evaluation, it will present its recommendations to the GST Council for further consideration.
While the Council has not set a timeline for the final decision, stakeholders are watching closely. The outcome will determine whether small digital transactions remain an affordable and convenient option or if the costs of these payments will rise significantly.
Conclusion: GST on Online Transactions
The proposal to impose GST on small digital transactions could have far-reaching effects on India’s digital economy. More than 80% of online payments fall below ₹2,000, making this a critical issue for both merchants and payment aggregators. If the GST Council decides to implement the 18% tax, businesses could see higher costs, which may ultimately be passed on to consumers. The fitment committee’s analysis will be crucial in determining the path forward.
For now, small businesses and payment aggregators await further clarification from the government. As digital payments continue to grow, it’s essential to strike a balance between promoting cashless transactions and ensuring that small businesses aren’t burdened with excessive fees. The coming months will likely provide more insight into how the GST Council plans to handle this issue, potentially reshaping the future of India’s digital payments landscape.
