The Supreme Court has questioned the legal basis of India’s new Merchant Discount Rate (MDR) on certain UPI payments above Rs 2,000, asking the government to explain what exactly the charge represents if it is neither a tax nor a fee.
The court, however, refused to temporarily stop the new MDR framework, which is scheduled to take effect from October 15.
Supreme Court Questions Legal Basis Of UPI MDR
A three-judge bench headed by Chief Justice Surya Kant was hearing a petition challenging the government’s decision to introduce MDR on specified person-to-merchant UPI transactions.
During the hearing, Justice Joymalya Bagchi questioned the character and legal basis of the charge.
The government told the court that MDR is neither a tax nor a fee and that the money does not go to the government.
This prompted the court to question the legal basis under which money could be deducted from a commercial transaction.
Government Says It Doesn’t Get A Single Paisa
The Centre argued that MDR should not be treated as a government levy.
Instead, the money will be distributed among participants in the digital payments ecosystem, including banks, payment service providers and UPI application providers.
These organisations incur infrastructure and operational costs for processing digital payments.
The government maintains that introducing MDR for certain transactions will help make India’s massive UPI ecosystem financially sustainable.
0.4% Charge On UPI Payments Above Rs 2,000
Under the new framework, general person-to-merchant UPI transactions above Rs 2,000 will attract an MDR of 0.4%.
For transactions worth Rs 75,000 or more, the MDR will be capped at Rs 300.
However, this does not mean every UPI payment above Rs 2,000 will become chargeable.
Person-to-person UPI transfers will remain completely free irrespective of the amount.
Merchant transactions of up to Rs 2,000 will also continue to have zero MDR.
Small merchants receiving up to Rs 1 lakh per month through qualifying UPI QR payments will remain protected under the zero-MDR framework.
Special Rs 5 Charge For Essential Sectors
Certain essential and low-margin sectors will receive special treatment.
UPI payments above Rs 2,000 for railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of Rs 5 per transaction.
Capital-market transactions involving mutual funds, securities and stockbrokers will attract an MDR of 0.02%, subject to a Rs 300 cap.
The government estimates that around 96% of merchant UPI transactions will remain unaffected.
Customers Should Not Pay MDR
The government has also maintained that customers should not be charged the MDR.
The cost is supposed to be borne within the merchant-payment ecosystem. Banks have been advised to ensure that merchants do not pass the MDR directly to customers.
UPI applications are also not permitted to impose additional platform fees or hidden charges on users under the framework.
Supreme Court Refuses To Stop New Charges
The petitioner sought an interim stay on the new system, arguing that introducing charges could encourage merchants and consumers to return to cash transactions.
The Supreme Court declined to stay the framework.
However, it has asked the Centre to provide an affidavit explaining the legal and policy basis for the MDR. Notices have also been issued to the RBI and NPCI.
The court’s refusal to grant a stay does not amount to approval of the MDR’s legality. That question remains under examination.
Summary
The Supreme Court has questioned the legal basis of the government’s new UPI MDR framework, asking what the charge represents if it is neither a tax nor a fee. From October 15, specified merchant UPI payments above Rs 2,000 will attract 0.4% MDR, while person-to-person transfers, smaller transactions and qualifying small merchants will remain exempt.
