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Informist, Monday, Sept. 28, 2026

 

--SC refuses interim stay on merchant discount rate on UPI transactions 

--SC notice to fin min, RBI, NPCI on plea to quash MDR on UPI transactions 

 

NEW DELHI – The Supreme Court Monday refused to stay the government's move to levy a merchant discount rate of 0.4% on merchant payments made through the Unified Payments Interface on transactions above INR 2,000 from Oct. 15. The apex court issued notices to the Ministry of Finance, the Reserve Bank of India and National Payments Corp. of India on a petition seeking quashing of the merchant discount rate. Advocate Anjan Datta, the petitioner, had argued that the newly introduced charges would ultimately affect common citizens. 

 

The bench led by Chief Justice of India Surya Kant asked the finance ministry to explain the basis for its move to levy the merchant discount rate. "We need these facts on affidavit. It's more of a technical issue," said Chief Justice Surya Kant. "Is it tax or a fee? If not a fee, what is the executive basis for making this expropriation? What is the service?" asked the bench, also comprising Justice Joymalya Bagchi and Justice V. Mohana. 

 

The apex court referred to Section 269SU of the Income Tax Act, 1961 which mandates merchants meeting the threshold turnover to provide electronic mode of payment facility to the customers. If Section 269SU permits transfer of money through electronic mode of payment, then what is the character of receipt in the transactions, asked the top court. "We are not on the coverage (of merchant discount rate). We are on legal incidence. What is the source of legal incidence of this?" asked the court. 

 

The imposition of merchant discount rate on commercial UPI transactions could have a wider impact on the public, as businesses may pass on the additional costs to consumers, said the petitioner. The fixation of a detailed, multi-tiered financial levy through a press release rather than a notified statutory instrument, and without any legislatively prescribed guidelines, criteria, or Gazette publication governing the rates, caps, or sectoral classifications so fixed, is manifestly arbitrary and discriminatory, said the petitioner. 

 

Earlier this month, the government said that while person-to-person transactions would remain completely free, the merchant discount rate will apply only to specified person-to-merchant transactions above INR 2,000, with the rate capped at INR 300 for transactions of INR 75,000 and above. No transaction fee, platform fee, or other charge can be imposed on individuals for sending or receiving money through UPI, it said. For merchants, payments up to INR 2,000 would remain free of the merchant discount rate, it had said. Small merchants, including street vendors and neighbourhood shops, receiving up to INR 100,000 a month through UPI QR codes under the person-to-person-merchant category would also continue to enjoy a zero merchant discount rate on all transactions. As a result, around 96% of merchant transactions are expected to remain unaffected, the government said.

 

The government said transactions above INR 2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel, and agricultural inputs, would instead attract a flat merchant fee of INR 5 per transaction. It also specified railways, telecom, and insurance among the merchant categories covered by the flat fee.

 

For capital-market transactions, including payments to mutual funds, securities firms, stockbrokers and dealers, the merchant discount rate will be 0.02%, capped at INR 300 per transaction, it said. The government said the lower rate was aimed at promoting retail participation and financial inclusion in formal financial markets.

 

The government clarified that the merchant discount rate is not a tax or a charge collected by the government or National Payments Corp. of India. Instead, it would be distributed among participants in the payment ecosystem, including banks, payment service providers, and UPI application providers, to support the operation and expansion of the UPI ecosystem. UPI application providers will be prohibited from levying platform fees or hidden charges on users, while banks have been advised to ensure that merchants do not pass the merchant discount rate on to customers. Individuals will continue to have unlimited free use of UPI, with no monthly quotas or tiered caps.  End

 

Reported by Surya Tripathi

Edited by Deepshikha Bhardwaj

 

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