Government Refutes External Pressure Allegations
The Indian government has firmly dismissed allegations that the introduction of Merchant Discount Rates (MDR) on Unified Payments Interface (UPI) transactions was driven by external pressure. Government sources described such claims as "false and misleading," emphasizing that the policy is a domestic regulatory measure designed to ensure a sustainable payment ecosystem.
Officials pointed to a report by the US Trade Representative, which had sought parity for foreign-operated credit cards on the UPI network. India did not accede to this demand. Instead, the government highlighted that RuPay debit cards have been deliberately kept MDR-free, providing them a competitive advantage over cards issued by foreign entities. This structure, officials argued, directly contradicts the narrative that the policy favors outside interests.
GST Clarification and Revenue Impact
A significant point of confusion regarding the new MDR structure was the application of Goods and Services Tax (GST). Officials clarified that while GST is levied on MDR charges, businesses are entitled to claim the full input tax credit. This allows them to set off the liability against their output tax, meaning the government does not anticipate earning any net revenue from this specific levy.
Sources dismissed rumors of a fresh GST burden on UPI users as baseless. They noted that any residual concerns regarding the tax treatment would be examined by the GST Council, ensuring that the policy does not inadvertently increase costs for end-users or small businesses.
Tiered Fee Structure and Exemptions
Following amendments to the Payment and Settlement Systems (PSS) Act, a government notification dated September 14 established a clear framework for UPI charges. Transactions up to Rs 2,000 using UPI and RuPay debit cards remain free of charge. For transactions exceeding this threshold, the National Payments Corporation of India (NPCI) has introduced a tiered MDR structure.
Peer-to-peer (P2P) transactions remain exempt from these charges. Other categories face varying fees, ranging from a nominal flat fee of Rs 5 to approximately 0.4% for select verticals. Specifically, a 0.02% MDR charge has been introduced for stock market transactions, following consultations with the Securities and Exchange Board of India (SEBI), stock exchanges, and other stakeholders.
Promoting Competition and Protecting Small Merchants
The MDR policy is framed as a response to a 2020 mandate that capped any single UPI player's market share at 30%. Officials explained that this cap could not be effectively enforced without a sustainable revenue model for newer, smaller fintech entrants. By introducing MDR, the government aims to provide a viable business case for these smaller players, thereby encouraging competition in the market.
Crucially, the policy is designed to protect the vast majority of merchants. Approximately 96% of merchants, primarily small traders with an annual turnover below Rs 40 lakh, are shielded from any fee. This ensures that the digital payment ecosystem remains accessible and affordable for the grassroots level of the economy.
Implementation and Monitoring
The rollout of the new MDR structure is slated for October 15. Government officials stated that they will closely monitor the implementation to ensure that merchants do not pass on the charges to consumers. There is confidence that the MDR will not trigger a shift back to cash payments or cause a decline in UPI usage.
"We are confident that there will be no increase in cash transactions and also don't expect UPI transactions to fall after the rollout on 15th October," officials said. The policy underscores the government's commitment to maintaining the momentum of India's digital payments revolution, which has scaled from 1.78 crore transactions in its early years to over 24,000 crore annual transactions, with more than 6.5 crore merchants on board.