Do Merchant Fees Have GST? What Your Business Needs to Know

Merchant fees are charges businesses incur for accepting electronic payments, such as credit cards, debit cards, and mobile payments. Goods and Services Tax (GST) is a broad-based consumption tax applied to most goods and services in many countries worldwide. This article explores the tax treatment of merchant fees, specifically addressing whether they are subject to GST.

Defining Merchant Fees

Merchant fees encompass various charges levied by banks, payment processors, or credit card networks. They allow companies to process transactions efficiently and securely, a standard practice in today’s digital economy.

The components of merchant fees can vary, but commonly include transaction fees, which are often a percentage of the transaction value plus a flat per-transaction fee. Other typical charges are percentage-based fees, statement fees for processing reports, and gateway fees for utilizing online payment portals. These charges collectively represent the cost of processing electronic payments.

GST Treatment of Financial Services

Businesses typically collect GST from customers and remit it to the government. However, many jurisdictions that implement GST schemes provide specific exemptions for financial services.

Merchant fees fall under the category of charges for financial services, as they relate to the processing and facilitation of monetary transactions. Due to the exemption of financial services from GST in many countries, these fees generally do not have GST applied to them by the financial institution or payment processor. This means that when a business receives a statement for merchant fees from its payment processor, GST is typically not an additional line item. It is important to note that the United States does not have a federal Goods and Services Tax; instead, it utilizes state and local sales taxes.

Business Impact of GST Exemptions

For businesses operating in countries where GST is applicable, the exemption of merchant fees has direct implications for their tax reporting and calculations. Since no GST is charged on these fees by the financial service providers, businesses cannot claim input tax credits related to them. Input tax credits allow businesses to recover GST paid on their purchases, reducing their overall GST liability.

The absence of GST on merchant fees means these costs are treated as a regular business expense rather than a transaction subject to consumption tax. Businesses must account for these fees in their financial records without considering any GST component or corresponding input tax credit. For businesses in the United States, the concept of GST input tax credits on merchant fees does not apply, as there is no federal GST. However, merchant fees are generally considered ordinary and necessary business expenses and are tax-deductible for income tax purposes.