India
Government Defends UPI MDR Charges, Cites No Prior Zero‑MDR Assurance
The Centre said that person‑to‑merchant (P2M) UPI transactions up to ₹2,000 would remain exempt from Merchant Discount Rate (MDR). In a counter‑affidavit filed before the Supreme Court on November 4, the Union government defended the proposed MDR charges on UPI transactions above ₹2,000, stating that merchants were never assured that UPI payments would stay free indefinitely. The government said the revised MDR framework had been under consideration well before its introduction and was finalised after consulting stakeholders. It added that no specific assurance of a continuing zero‑MDR regime was given to merchants and that the subsidy provided by the State was discretionary rather than obligatory.
The government is responding to a Public Interest Litigation filed by lawyer Anjan Datta, which challenges the revised MDR framework and alleges that the charges violate the fundamental rights to equality and to practise any profession or carry on any occupation, trade or business under Articles 14 and 19(1)(g) of the Constitution.
Justification for the ₹2,000 threshold The Centre said the classification of transactions based on value, payment mode and merchant category meets the constitutional test of “intelligible differentia” under Article 14 and has a rational nexus with the objectives of financial inclusion, affordability and the long‑term sustainability of the digital payments ecosystem. It said the ₹2,000 threshold protects ordinary retail transactions and small merchants, while allowing higher‑value transactions involving merchants better able to bear a modest charge.
The government also defended the differential treatment of UPI and RuPay debit cards, arguing that the two payment systems operate through distinct technological architectures, commercial arrangements and cost structures. It said the continued zero‑MDR regime for RuPay advances the policy objective of promoting a domestic card network.
MDR and merchants’ rights The Centre argued that the revised framework does not impose an unreasonable restriction on merchants’ right to carry on business under Article 19(1)(g). It said the Constitution does not guarantee that commercial infrastructure must remain free of cost and that a charge reducing a merchant’s profit margin does not, by itself, amount to a violation of fundamental rights. The government also pointed out that merchants cannot pass on MDR charges to consumers.
Addressing the allegation that the charges amount to an unauthorised levy, the Centre said MDR is neither a tax nor a fee imposed by the government. Instead, it described MDR as a commercial payment deducted from a merchant’s settlement under its arrangement with the acquiring bank. The government said its role is limited to determining which electronic payment modes remain exempt from charges under Section 10A of the Payment and Settlement Systems Act, 2007. Commercial arrangements for transactions outside the exemption, including the determination of MDR, fall within the domain of the National Payments Corporation of India (NPCI), which operates UPI under authorisation from the Reserve Bank of India (RBI). According to the Centre, NPCI determines the applicable charges and their distribution among participants in the payment ecosystem. Since the government neither fixes nor collects MDR, Article 265 of the Constitution, which prohibits the levy or collection of taxes without the authority of law, does not apply in this case.
Subsidy figures The government said it had disbursed ₹8,730 crore in incentives to acquiring banks between 2021‑22 and 2024‑25 to support zero‑MDR transactions. It argued that these subsidies covered only a fraction of the estimated annual operating costs of the UPI ecosystem, which it placed at around ₹20,700 crore. The government said a sustainable funding model was necessary to support investments in cybersecurity, fraud prevention, dispute resolution, technological development and the expansion of digital payment infrastructure.
Impact on UPI transactions The Centre maintained that the revised framework would leave the overwhelming majority of UPI transactions unaffected. Person‑to‑person (P2P) transactions would continue to remain exempt irrespective of their value. Person‑to‑merchant (P2M) transactions up to ₹2,000 would also attract zero MDR. Transactions involving small merchants receiving up to ₹1 lakh a month through UPI QR codes would remain exempt from the proposed charges.
Legislative route The government defended the legislative route adopted to introduce the revised framework, arguing that the amendment to Section 10A was validly passed as part of a Money Bill, as it had a direct bearing on government expenditure from the Consolidated Fund, given the subsidies previously provided to sustain zero‑MDR transactions.
Supreme Court proceedings In September 2026, while hearing the PIL filed by Anjan Datta challenging the revised MDR framework, the Supreme Court declined to stay its implementation. It issued notices to the Union government and NPCI, seeking their responses. The revised MDR framework was initially scheduled to come into effect on October 15, 2026. NPCI subsequently deferred its implementation. On November 3, NPCI filed its counter‑affidavit before the Supreme Court, defending the proposed charges. NPCI argued that MDR would apply to only a small fraction of P2M transactions, with around 96% of such transactions remaining unaffected under the revised framework. It also rejected the petitioner’s apprehension that the charges could lead merchants to increase prices, describing the concern as misplaced.