The Indian government has proposed a major change to the Unified Payments Interface (UPI) ecosystem: the Merchant Discount Rate (MDR) on some UPI transactions shall be imposed. If the proposal is approved, only merchant payments (most of which will be made to large companies for transactions above ₹2,000) will be taxed and the consumers are not charged.
The proposal is being considered and not yet implemented.
What is MDR?
Merchant Discount Rate (MDR) is a fee paid by merchants to banks and payment service providers for processing digital transactions. It helps cover the costs of payment infrastructure, technology, fraud prevention and transaction processing.
Since January 2020, UPI transactions have largely been exempt from MDR due to amendments to the Payment and Settlement Systems Act, making UPI free for both merchants and consumers.
What has the government proposed?
The Finance Ministry has proposed repealing the provision that bans MDR on UPI payments, allowing payment service providers and banks to levy MDR on some types of merchant transactions.
According to reports, the proposal may include:
MDR on UPI transactions above ₹2,000. Apply mainly to large merchants and businesses. Consumers are not supposed to pay the fee directly. Small merchants could have exemptions or lower charges depending on the final policy.
The proposal is still being discussed and it is possible that the final one would differ from the current reports.
Will consumers have to pay?
According to the proposal, customers making UPI payments are unlikely to be charged any additional fee.
Instead, MDR would be borne by merchants, similar to how card payment processing charges presently work.
But businesses may review their pricing strategies over time in light of operational costs, but there have been no such changes announced.
Why is MDR being considered?
The industry pros believe the proposal will help the UPI ecosystem to become more financially viable.
Banks and payment service providers have long argued that processing billions of UPI transactions without MDR creates significant operational costs. MDR for select high-value commercial transactions could help support:
Payment infrastructure upgrades. Cybersecurity and fraud prevention. Innovation in digital payment services. Long-term sustainability of the UPI ecosystem. Impact on Businesses
If implemented, large merchants accepting high-value UPI payments may have to pay processing charges on eligible transactions.
This would have a slight increase in payment acceptance costs for businesses, but much of the impact would be limited since UPI is very efficient and popular.
Current Status
The proposal is still being studied and no final decision has been made by the government.
Any change to the MDR framework would likely require official notification, along with detailed guidelines regarding:
Eligible transaction limits. Merchant categories. MDR rates. Effective implementation date.
Until then, UPI transactions are free for consumers under the existing rules.
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