India Introduces Amendments to Payment Act, Paving Way for Merchant Discount Rate on UPI Transactions

Finance Minister Nirmala Sitharaman introduced the amendments to the Payment and Settlement Systems Act, 2007 in Parliament on Monday. This will enable the government to introduce a Merchant Discount Rate (MDR) on select UPI transactions in the future. The government currently has not approved any fee yet. However, this has opened the doors for introducing a MDR in future. As per reports, no decision has been taken yet as this matter is under still discussing on how the fee could be implemented. With the new Amendment, the government can now decide which digital payment modes should remain exempt from charges and which could attract MDR in the future. According to sources, the government is considering to put an MDR of 0.3 percent to 0.5 percent on UPI transactions above Rs 2,000. However, this MDR might only be levy upon the merchants with an annual turnover of more than Rs 1.5 crore. This means consumers are unlikely to pay anything extra, while small businesses may continue to enjoy fee-free UPI transactions. Meanwhile, another proposal has also recommended to determine the fee based on a merchant’s annual turnover instead of focusing on individual transactions. Policymakers are exploring different approaches to ensure that if MDR is introduced, the burden falls mainly on larger businesses rather than neighbourhood shops and small retailers. Note that MDR is a fee charged by banks and payment service providers to businesses for digital payments. Unlike UPI, merchants already pay processing charges on card payments. Businesses typically pay around 1.5 percent on credit card transactions, while debit card payments can attract lower fees depending on the bank and payment network. UPI has been exempt from such charges, making it an attractive payment option for both merchants and customers.