Merchants were never assured of zero MDR on UPI indefinitely: Govt to Supreme Court

Merchant Discount Rate, or MDR, is the charge linked to processing a digital payment. In the framework described here, it is deducted from the amount settled to a merchant after a transaction. It matters because a zero-MDR policy does not remove processing costs; it shifts them to the government and other participants.

For example, if a merchant receives a digital payment that attracts MDR, the acquiring bank settles slightly less than the transaction value. The article calls MDR a commercial payment made under the merchant’s arrangement with the acquiring bank. NPCI determines applicable charges and their distribution among participants in the payment ecosystem.

The merchant ultimately bears the direct reduction in the settlement amount. The Centre said merchants cannot pass MDR charges on to consumers. It also said MDR is neither a government tax nor a fee, so the constitutional rule on taxes does not apply to it.

The policy change is a proposed revised MDR framework for UPI. Under it, person-to-merchant transactions worth up to ₹2,000 would remain exempt from MDR. The Centre is defending charges on eligible UPI transactions above that amount before the Supreme Court.

The government said the framework was considered before introduction and finalised after stakeholder consultation. It also said merchants were never given a specific assurance that UPI payments would remain free indefinitely. State subsidies supporting zero-MDR payments were described as discretionary rather than obligatory.

The change matters because it would alter who funds UPI payment processing. The Centre said zero MDR shifted costs to the government and other ecosystem participants. It cited a need for sustainable funding for cybersecurity, fraud prevention, dispute resolution, technology and expanded digital-payment infrastructure.

The proposed framework keeps person-to-person, or P2P, UPI transactions exempt regardless of their value. It also exempts person-to-merchant, or P2M, transactions up to ₹2,000. This is intended to protect ordinary retail purchases and small merchants.

A larger payment to a merchant could fall outside the exemption and attract MDR. The Centre said the threshold separates transactions by value, payment mode and merchant category. It argued that some higher-value merchant transactions involve businesses better placed to bear a modest charge.

The article does not provide a complete list of affected merchant categories or a final rate. It says NPCI determines applicable charges and their distribution among ecosystem participants. Thus, the main distinction is clear: P2P remains free, while qualifying P2M payments above ₹2,000 may not.

The Centre said it disbursed ₹8,730 crore in incentives to acquiring banks between 2021-22 and 2024-25. The money supported transactions operating under the zero-MDR regime. This shows that free-to-the-merchant payments still create processing and infrastructure costs.

The government compared that support with an estimated annual UPI operating cost of around ₹20,700 crore. It cited Parliamentary Standing Committee reports while arguing that subsidies covered only a fraction of the ecosystem’s yearly expenses. The figures concern different time scales, so they are not a direct one-year comparison.

The funding gap is central to the Centre’s argument for a sustainable model. It said payments require continuing investment in cybersecurity, fraud prevention, dispute resolution, technology and infrastructure expansion. MDR on some higher-value merchant payments is presented as one possible way to support that system.

If eligible higher-value UPI payments attract MDR, merchants would receive less than the transaction value after the charge is deducted. The Centre said a lower profit margin does not automatically violate a merchant’s rights. It also stated that merchants cannot pass the MDR on to consumers.

For example, a merchant receiving a qualifying payment would have the applicable commercial charge deducted from settlement by the acquiring bank. NPCI determines the charge and its distribution among ecosystem participants. The article does not state the final MDR rate, so the exact effect on any merchant cannot be calculated.

The broader consequence concerns funding. The Centre said zero MDR shifted costs to the government and other participants, while UPI’s estimated annual operating cost was about ₹20,700 crore. A sustainable model could support cybersecurity, fraud prevention, dispute resolution, technological development and infrastructure expansion.

Under Article 14, the Centre says the framework distinguishes transactions using intelligible differentia. Value, payment mode and merchant category are treated differently because the government says they connect rationally with financial inclusion, affordability and long-term sustainability. The ₹2,000 threshold is meant to protect ordinary retail payments and small merchants.

Under Article 19(1)(g), the government argues that the right to conduct business does not guarantee free commercial infrastructure. A charge that reduces profit is not, by itself, an unreasonable restriction. The Centre also says merchants cannot pass the charge to consumers, but describes MDR as a commercial settlement deduction rather than a government levy.

The Centre further distinguishes UPI from RuPay debit cards because their technology, commercial arrangements and cost structures differ. It says the continued zero-MDR RuPay regime promotes a domestic card network. The Supreme Court will consider these arguments in the PIL challenging the framework.

A UPI payment starts when a customer authorises money to move from the customer’s bank account to a merchant’s account. In the usual payment flow, the customer’s bank receives the instruction, UPI routes it through the participating banks, and the merchant’s acquiring bank receives and settles the funds. The article does not describe each technical step.

NPCI operates UPI under authorisation from the RBI. It determines applicable commercial charges and how they are distributed among participants. The acquiring bank is the merchant’s banking partner and deducts any MDR from the merchant’s settlement. The customer’s bank and merchant’s bank process the account-side movement.

The RBI’s role in the article is authorising NPCI to operate UPI, not fixing or collecting MDR. The Centre says the government only decides which electronic payment modes remain exempt under Section 10A of the Payment and Settlement Systems Act, 2007. The detailed flow above reflects established payment-system practice beyond the article’s brief description.