Government May Allow Merchant Charges On UPI Payments Above ₹2,000

The Central government is mulling on introducing Merchant Discount Rate (MDR) charges on Unified Payments Interface (UPI) transactions exceeding ₹2,000 to be levied on businesses, thus deviating from the existing zero MDR regime for digital payments.

The proposal is based on amendments made to the Payment and Settlement Systems Act that were introduced in Parliament, allowing the possibility of charging MDR for some electronic payment modes. But the proposed modifications are not going to automatically charge for these and will provide the government with the power to inform of such fees in the future.

The government is likely to impose an MDR of 0.25% to 0.4% on UPI transactions above ₹2,000 that are made to merchants, reports say. UPI payments between individuals (P2P) should stay free and won’t impact individual users who are sending money to close friends and relatives.

FM Nirmala Sitharaman introduced the Taxation and Other Laws (Amendment) Bill on Tuesday, which aims to lift the restriction on banks and payment service providers’ ability to impose MDR on designated electronic payment methods. According to government representatives, the proposal’s implementation date has not been decided.

The measure is meant to recoup the expenses banks, payment service providers and fintech firms will incur to sustain the digital payments system. The industry has been long demanding that the zero-MDR policy has proved to be financially challenging for the UPI ecosystem even though it has seen an unprecedented growth.

If adopted, this fee would not cover typical peer-to-peer transfers, but would mainly have an impact on merchant transactions, especially those involving large payments. The government has yet to make a final determination regarding the fee structure and the actual threshold, fee, and categories of merchants that will be included will be announced only after the legislation has gone through the legislative process.

The proposal has raised discussion on the longer term sustainability of India’s digital payments ecosystem and the need to maintain UPI’s affordability for the businesses and consumers who are using it. The payment companies have been receptive to the idea of a revenue model while merchant groups are likely to be asking questions about the proposed charges.