If neither a tax nor fee, what is this ‘expropriation’, SC asks govt. on UPI merchant discount rate
Worth reading — 1 past UPSC question on this theme (Prelims GS-1 2018).
2-minute summary
The Supreme Court of India has issued notices to the Union Government, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) regarding a notification introducing a 0.4% Merchant Discount Rate (MDR) on Person-to-Merchant (P2M) UPI transactions exceeding ₹2,000. The Court has questioned the legal character of this charge, asking whether it constitutes 'expropriation' if it is neither classified as a tax nor a fee. The petitioner has also challenged the constitutional validity of Section 10A of the Payment and Settlement Systems Act, 2007, which grants the executive powers to decide which electronic payment modes receive zero-charge protection (such as RuPay debit cards). The government defended the move, stating it affects only 4% of transactions, is capped, and goes entirely to banks and aggregators to sustain the digital payment ecosystem, rather than the government treasury.
Why it's in the news
The Supreme Court has issued notices to the Centre, RBI, and NPCI questioning the legal validity of the UPI MDR framework and the constitutional validity of Section 10A of the Payment and Settlement Systems Act, 2007.
Facts to remember
- The Supreme Court issued notices regarding a notification introducing a 0.4% Merchant Discount Rate on Person-to-Merchant UPI transactions exceeding ₹2,000.
- The Supreme Court questioned the legal character of the MDR charge, asking if it constitutes expropriation if it is neither a tax nor a fee.
- A Zero-MDR policy on UPI and RuPay debit card transactions was introduced from January 1, 2020.
- The 0.4% MDR framework affects 4% of transactions while keeping 96% of low-value users exempt.
Background and context
The Merchant Discount Rate (MDR) is the fee charged to merchants by banks and payment service providers for processing digital transactions. To accelerate digital payment adoption, the Indian government introduced a 'Zero-MDR' policy on UPI and RuPay debit card transactions from January 1, 2020, by inserting Section 10A into the Payment and Settlement Systems (PSS) Act, 2007. While this policy catalyzed the exponential growth of UPI, banks and payment aggregators argued that the lack of a sustainable revenue model hindered infrastructure development, security upgrades, and financial viability. The September 2026 notification attempts to strike a balance by introducing a capped 0.4% MDR on high-value P2M transactions (>₹2,000) while keeping 96% of low-value users exempt.
Constitutional provisions
- Article 265 — Mandates that no tax shall be levied or collected except by authority of law. The Supreme Court is examining if the MDR mandate, if not a tax or fee, constitutes an unauthorized executive expropriation.
- Article 14 — Guarantees equality before the law. The petitioner argues that selectively exempting certain payment modes (like RuPay debit cards) from MDR while charging UPI creates an arbitrary classification.
- Article 19(1)(g) — Guarantees the right to practice any profession, trade, or business. Arbitrary caps or complete restriction on service fees (Zero-MDR) impact the commercial freedom of payment aggregators and banks.
Committees and reports
- Watal Committee on Medium Term Recommendations on Strengthening Framework for Digital Payments — Recommended a balanced, market-driven pricing framework for digital payments to ensure the commercial viability of payment service providers.
Government schemes
- Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions — A central sector scheme providing financial incentive/subsidy to acquiring banks to compensate for the loss of MDR on low-value transactions.
Previous UPSC questions on this theme
- Prelims GS-1 2018 — Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news? (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (c) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards. (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.
Mains practice: Examine the economic and legal challenges associated with the 'Zero-MDR' policy on digital payments in India. How does the recent judicial scrutiny over UPI MDR charges highlight the conflict between promoting financial inclusion and ensuring the commercial viability of payment service providers?
The Merchant Discount Rate (MDR) is the fee charged to merchants for processing digital transactions. While the government's 'Zero-MDR' policy under Section 10A of the Payment and Settlement Systems (PSS) Act, 2007, catalyzed India's digital payments revolution, it has triggered intense debate over its legal validity and economic sustainability.
• **Legal and Constitutional Challenges**:
- **Issue of Expropriation**: The Supreme Court has questioned the legal character of zero/capped MDR. If it is neither a tax (Article 265) nor a regulatory fee, forcing private entities to provide services without compensation may amount to executive expropriation.
- **Excessive Delegation**: Section 10A of the PSS Act is challenged for giving unguided powers to the Executive to selectively exempt payment modes (e.g., RuPay vs. UPI), potentially violating Article 14 (equality) and Article 19(1)(g) (freedom of trade).
• **Economic Challenges**:
- **Infrastructure Viability**: Zero-MDR deprives banks and payment aggregators of revenue needed to maintain secure servers, prevent cyber fraud, and expand digital payment infrastructure.
- **Dependence on Subsidies**: The ecosystem relies heavily on government fiscal payouts to compensate for losses, which creates fiscal strain and uncertainty.
• **The Conflict: Financial Inclusion vs. Commercial Viability**:
- **Inclusion**: Free UPI transactions democratized digital payments, bringing millions of small merchants and rural users into the formal financial fold. Reintroducing MDR risks pushing marginal merchants back to cash.
- **Viability**: Without a sustainable revenue model, innovation in fintech slows down, and the quality of digital payment services may degrade.
In conclusion, India needs a hybrid, transparent regulatory model. Implementing a tiered MDR (exempting micro-transactions while charging high-value commercial transactions, as proposed in the 0.4% cap) can protect small users while ensuring the financial health of the digital payment ecosystem.
Prelims practice questions
Q1. With reference to the Payment and Settlement Systems Act, 2007, consider the following statements: 1. The Reserve Bank of India (RBI) is the designated authority to regulate and supervise payment systems in India. 2. Section 10A of the Act prohibits banks and system providers from imposing any charge on a payer or a beneficiary using prescribed electronic payment modes. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: C. Both statements are correct. The RBI regulates payment systems under the PSS Act, 2007. Section 10A was inserted to mandate zero-MDR on specified electronic payment modes (like UPI and RuPay debit cards) to promote digital transactions.
Q2. Which of the following entities is primarily responsible for operating the Unified Payments Interface (UPI) platform in India?
- National Payments Corporation of India (NPCI)
- Ministry of Electronics and Information Technology (MeitY)
- Reserve Bank of India (RBI)
- Indian Banks' Association (IBA)
Answer: A. The National Payments Corporation of India (NPCI), an initiative of the RBI and IBA under the PSS Act, 2007, operates the UPI platform.
Q3. In the context of the digital economy, the term 'Merchant Discount Rate' (MDR) is best defined as:
- The fee charged to a merchant by a bank for accepting payments from customers through digital means.
- A tax levied by the government on luxury goods sold via online platforms.
- A discount offered by e-commerce websites to customers using digital payment modes.
- The rate of interest charged by banks on short-term loans given to retail merchants.
Answer: A. MDR is the rate charged to a merchant by a bank/payment aggregator for processing digital transactions (debit/credit cards, UPI, etc.).
Revision flashcards
- What is Merchant Discount Rate (MDR)? The fee charged to a merchant by acquiring banks and payment service providers for processing digital transactions.
- Which statutory provision mandates the zero-MDR policy for specified digital payment modes in India? Section 10A of the Payment and Settlement Systems (PSS) Act, 2007.
- Which organization developed and operates the Unified Payments Interface (UPI)? National Payments Corporation of India (NPCI).
- What constitutional article states that 'no tax shall be levied or collected except by authority of law'? Article 265 of the Constitution of India.
- What is the threshold and rate proposed in the September 2026 notification for UPI P2M MDR charges? An MDR of 0.4% on Person-to-Merchant (P2M) UPI transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above.