Overview
The Taxation and Other Laws (Amendment) Bill, 2026 contains a clause to amend Section 10A of the Payment and Settlement Systems Act, 2007. The amendment would allow the government to levy a Merchant Discount Rate (MDR) of 0.25‑0.5% on UPI transactions above ₹2,000.
Key Developments
- The proposed MDR would affect roughly 5% of UPI transactions by volume but about 65% of the total transaction value.
- The government argues the tax targets only large‑value payments, sparing everyday purchases like milk and vegetables.
- Critics say the move reverses a decade‑long policy of zero‑MDR that helped shift India from cash to digital payments.
Important Facts
1. Policy reversal: After demonetisation in 2016, the government promoted UPI with a zero‑MDR subsidy to accelerate cashless transactions.
2. Two‑sided market dynamics: UPI operates as a platform connecting merchants and consumers. Taxing one side can affect the other, and the actual burden may shift to banks, payment service providers (PSPs), or consumers.
3. Potential impact on banks and PSPs: If banks absorb the MDR, their profit margins shrink, possibly reducing investment in security, fraud prevention, and outreach to underserved areas.
4. Financial inclusion stakes: UPI has brought informal cash transactions into a digital trail, aiding credit assessment and tax compliance. A tax could dampen the incentive to use UPI, slowing inclusion goals.
Exam Relevance
The issue touches multiple GS papers. Understanding the two‑sided market nature of digital payments is essential for GS‑3 (Economy). The policy shift illustrates how fiscal measures intersect with technology‑driven financial inclusion, a topic also relevant for GS‑4 (Ethics) when evaluating equity and access. Moreover, the amendment process showcases legislative mechanisms, linking to GS‑2 (Polity).
Way Forward
- Maintain zero‑MDR for low‑value payments to preserve the network effects that have made UPI a global leader.
- Seek alternative revenue sources such as broader GST reforms or corporate taxes rather than taxing a high‑growth digital infrastructure.
- Conduct impact assessment on how MDR would affect banks, PSPs, and end‑users before finalising the rule.
- Align with inclusion goals by ensuring any cost recovery does not deter small merchants or low‑income consumers from using digital payments.
In summary, while the proposed MDR aims to generate revenue, it risks undermining the very digital ecosystem that has driven financial inclusion and economic digitisation since 2016.