The Department of Financial Services (DFS) has been in talks with banks, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) to review the existing Goods and Services Tax (GST) turnover threshold for mandatory merchant registration and return filing. Several lenders have suggested increasing the limit significantly to ease compliance requirements for small businesses.
Under current GST rules, merchants with an annual turnover exceeding ₹40 lakh for goods and ₹20 lakh for services must register on the GST portal and file returns. While this does not necessarily mean paying GST—especially for exempt businesses—the registration itself adds a layer of compliance.
A senior finance ministry official noted that the government’s intention could be to minimise unnecessary compliance for micro and small businesses. “Registration is also a form of compliance. The idea would be to avoid burdening smaller merchants and reduce procedural requirements,” the official said.
Banks Recommend Raising Slab to ₹1 Crore
According to banking sources, several financial institutions have advised the DFS to raise the GST registration threshold to ₹1 crore annual turnover. They also proposed that the Merchant Discount Rate (MDR)—the fee charged by payment companies to facilitate digital transactions—should apply only to merchants crossing the ₹1 crore mark.
DFS sought industry views as part of its periodic review, particularly after the Karnataka Commercial Tax Department recently issued notices to merchants with turnover above ₹40 lakh. This action reportedly prompted many traders to revert to cash payments to avoid GST obligations—a trend seen by banks as detrimental to India’s push for formalised and digital business transactions.
Data Sought on Merchant Turnover and UPI Costs
As part of its consultations, DFS requested banks, the RBI, and NPCI to provide data on the number of merchants exceeding ₹20 lakh annual turnover, based on banking records such as current account activity. Last month, the RBI also sought details from banks regarding the cost of maintaining the Unified Payments Interface (UPI) infrastructure.
While GST policy decisions fall under the purview of the GST Council and the Department of Revenue, DFS acts as the coordinating body for engaging with financial institutions.
Industry Concerns Over Digital Payment Adoption
Bankers caution that imposing GST compliance and MDR fees on smaller merchants could slow digital payment adoption, especially among micro retailers in rural and semi-urban markets. UPI transactions have surged in recent years, with an estimated 35 crore QR codes deployed nationwide—though many are duplicates. About 64% of the nearly 20 billion monthly UPI transactions occur at merchant points.
“These offline retailers often operate on thin profit margins of 5–10%, translating to an annual income of around ₹10 lakh. Given that individuals with income below this level are exempt from income tax under the new regime, the same logic should apply to GST registration requirements,” one banker argued.
Industry leaders warn that forcing compliance on such merchants risks undoing years of progress in promoting digital transactions. “You don’t want these rules pushing businesses back to cash,” a senior banker emphasised.
DFS has not commented publicly on whether the recommendations will be acted upon. Sources note that such policy shifts often carry political considerations and may take time to materialise.
