Government Authorizes Banks to Impose Merchant Charges for UPI Transactions Following LS Bill Approval
In a significant legislative move, the Lok Sabha has approved a Bill amending the Payment and Settlement Systems Act, 2007, which may pave the way for the introduction of a Merchant Discount Rate (MDR) on UPI transactions exceeding Rs 2,000. This amendment allows the government to empower banks and payment service providers to impose charges on transactions conducted through the Unified Payments Interface (UPI) and other electronic payment modes. The Bill was passed without discussion amid disruptions in the House and removes the existing legal restriction that prevents the collection of MDR on notified electronic payment modes.
Implications of the Bill for UPI Transactions
The government aims to establish a framework where consumers and small businesses would pay a nominal fee for digital payment services. This is intended to provide banks, payment service providers (PSPs), and payment infrastructure companies with a sustainable revenue source. The Bill seeks to separate the Payment and Settlement Systems Act from the Income Tax Act, granting the government the authority to modify the current zero-MDR framework for UPI and RuPay card transactions.
Reports indicate that the government may allow banks and PSPs to charge an MDR of between 0.25% and 0.4% on UPI transactions over Rs 2,000, specifically for payments made to businesses. However, person-to-person transfers are likely to remain exempt. Setting the threshold at Rs 2,000 would mean that only about 5% of all UPI transactions would incur these charges, although they represent nearly 65% of the total value processed through the platform. Routine purchases like groceries and taxi fares are expected to remain unaffected.
RBI Governor’s Remarks on the Bill
RBI Governor Sanjay Malhotra commented on the potential introduction of MDR, stating it is “premature” to discuss this change. He emphasized the need for continued investment in public infrastructure for digital payments, noting that costs must ultimately be borne by someone. Malhotra highlighted the choice between funding through taxes or implementing an MDR under a ‘user pays’ model.
He reiterated that the costs associated with providing digital payment services must be addressed. Under the proposed model, the MDR would be charged to the merchant or individual conducting the transaction. In the absence of MDR, these costs would be covered by public tax revenues. Malhotra concluded by stressing the importance of ongoing investment in digital payment infrastructure while awaiting further developments.
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