GST Rumors around Credit Card Usage

There have been rumors being circulated that payments made using credit cards or other electronic modes of payment would result in double taxation under the newly-launched Goods and Services Tax. However, this is not correct since this tax is not based on the transaction, it is applied on the fees, or the merchant discount rate (MDR) that the merchant is charged by the bank. Since merchants are not allowed to pass on the MDR to the customer, any credit card transaction is not charged to the cardholder. 

For the customer there is no change as the merchant discount rate is not allowed to be passed on. For banks the difference is that they will now get input tax credit under GST. In the financial sector the only real impact of the imposition of GST is the three percentage point increase in tax. 

For example, if you spend Rs 5,000 at a restaurant using your card, the owner of the business pays Rs 100 as merchant discount rate to the bank. Since the Rs 100 is a fee against a service there was hitherto service tax applicable which was Rs 15. As opposed to the Rs 15 tax applicable earlier, in the GST era the merchant will now be paying a goods and service tax of Rs 18.

The government and banks have put these rumors to rest & said that businesses should pass on the benefits they get in the form of input tax credit through lower prices for customers. This has been made mandatory under clause 171of the GST bill. This clause also provides for the setting up of an anti-profiteering authority to take action against those who do not pass on savings to customers.

Revenue Secretary Hasmukh Adhia tweeted out saying that "A wrong message is doing rounds on social media that if you make payment of utility bills by credit cards, you will be paying GST twice. This is completely untrue. Please do not recirculate such message without checking it with authority,"

AP Hota, managing director, National Payments Corporation of India has confirmed that the rumours about double taxation were completely untrue: "There is no charge other than the service tax at the rate of 15% becoming GST at 18%” A senior banker said that "All services against which fees are charged in the financial sector are already taxed. However, there is no transaction tax” However, it is not yet clear how much of savings they will enjoy on account to the input tax credit.