In a step closer to possibly introducing Merchant Discount Rate (MDR) on UPI transactions, the Lok Sabha on Thursday approved a Bill amending the Payment and Settlement Systems Act, 2007.This empowers the government to allow banks and other payment service providers to impose charges on transactions conducted through the unified payments interface (UPI) and other electronic payment modes that may be notified.The amendment, cleared by the House without any discussion amid repeated disruptions, removes the existing legal restriction that bars banks and payment service providers from collecting MDR on notified electronic payment modes.
What the Bill means for UPI transactions
According to a PTI report, through this move, the government intends to create a framework under which consumers and small businesses pay a nominal fee for digital payment services while ensuring banks, payment service providers (PSPs) and payment infrastructure companies that support the digital payments ecosystem have a sustainable source of revenue.The Bill seeks to delink the Payment and Settlement Systems Act from the Income Tax Act while providing the government with the legal authority to alter the existing zero-MDR framework governing UPI and RuPay card transactions.On Wednesday, The Times of India reported that the government is likely to permit banks and payment service providers to levy a merchant discount rate of between 0.25% and 0.4% on UPI transactions exceeding Rs 2,000 when payments are made to businesses, while person-to-person transfers are expected to remain exempt.According to official estimates, setting the threshold at Rs 2,000 would bring only about 5% of all UPI transactions within its scope. However, these transactions account for nearly 65% of the total value processed through the platform.As a result, routine purchases such as milk, vegetables, groceries, or payments for auto-rickshaw and taxi rides are unlikely to be affected. UPI recorded 23.7 billion transactions in July, with the total value estimated at Rs 29.9 lakh crore.The proposed change could pave the way for merchant charges to be introduced on certain UPI transactions, signalling a possible departure from India’s current zero-charge digital payments model.Under the existing framework, banks and payment system providers are prohibited from imposing any direct or indirect charges on transactions carried out through UPI and RuPay debit cards.The proposed legislation empowers the central government to determine, through official notification, which electronic payment modes or categories of transactions will continue to remain exempt from such charges.Although the Bill does not itself impose a merchant discount rate or prescribe any fee, it establishes the legal foundation that would enable the government to revise the present zero-MDR framework at a later stage.The question of imposing MDR has remained a contentious issue, with banks and other participants in the payments industry consistently advocating its introduction, while the government has so far refrained from taking a decision even as digital payment platforms such as UPI have continued to witness robust growth.Some industry observers believe MDR could eventually be introduced for merchant-to-customer UPI transactions exceeding a specified value, while peer-to-peer transfers may continue to remain exempt.Unlike UPI transactions, which have so far remained free of such charges, real-time fund transfers carried out through RTGS and NEFT already attract a service fee.“In the Payment and Settlement Systems Act, 2007, in Section 10A, for the words, figures and letters ‘the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961’, the words ‘one or more electronic modes of payment as the central government may, by notification, specify’ shall be substituted with effect from the date of publication of this Act in the Official Gazette,” the Bill said.Section 10A of the Payment and Settlement Systems Act, 2007 bars banks and payment system providers from levying any fee on electronic payment transactions, while Section 269SU of the Income Tax Act mandates businesses with an annual turnover of more than Rs 50 crore to provide specified electronic payment options, including RuPay debit cards and BHIM-UPI QR codes.
What RBI governor said on the bill
Commenting on the issue on Wednesday, RBI Governor Sanjay Malhotra said it was “premature” to discuss the introduction of MDR on digital payment transactions.He stressed that continued investment in public infrastructure such as digital payments is essential and pointed out that the associated costs ultimately have to be borne by someone.Also Read | ‘Someone has to pay the cost’: RBI governor on MDR proposal for UPI transactions above Rs 2,000“The choices before us are simple: either the general public has to pay for it through taxes, or we have to levy the merchant discount rate, following the ‘user pays’ model.“Right now the government is getting us the amendment. Costs have to be paid by someone. We all want this public infrastructure to strengthen and become more efficient, etc. We continue to do that. That is our focus right now; let us wait and watch for further developments,” Malhotra said.Malhotra reiterated that the key issue is that the cost of providing the service has to be borne by someone.He explained that under the ‘user pays’ model, MDR is charged to the merchant or the individual undertaking the transaction. However, he added that in the absence of MDR, the expense is effectively met by the public through tax revenues.“What is important is that we continue to invest and continue to find the means, whether it is MDR or others. Let us wait and see how the situation evolves,” he said.
