Merchants were never assured of zero MDR on UPI indefinitely: Govt to Supreme Court

The Centre on Thursday defended the proposed Merchant Discount Rate (MDR) charges on Unified Payments Interface (UPI) transactions above ₹2,000, telling the Supreme Court that merchants were never assured that UPI payments would remain free indefinitely.Free UPI transactions cannot be guaranteed indefinitely, Centre argues in SC (HT photo)In a counter-affidavit filed before the Supreme Court on November 4, the Union government said the revised MDR framework had been under consideration well before its introduction and was finalised after consulting stakeholders.“Further, no specific assurance of a continuing zero-MDR regime was given to merchants, and the subsidy provided by the State was discretionary rather than obligatory,” the Centre said.The government was responding to a Public Interest Litigation (PIL) filed by lawyer Anjan Datta, challenging the revised MDR framework. It defended the proposed charges against allegations that they violate the fundamental rights to equality and to practise any profession or carry on any occupation, trade or business under Articles 14 and 19(1)(g) of the Constitution, respectively.Why the Centre says the ₹2,000 threshold is justifiedDefending the classification of transactions based on their value, payment mode and merchant category, the Centre said the framework meets the constitutional test of “intelligible differentia” under Article 14 and has a “rational nexus” with the objectives of financial inclusion, affordability and the long-term sustainability of the digital payments ecosystem.It said the ₹2,000 threshold was introduced to protect ordinary retail transactions and small merchants, while allowing higher-value transactions involving merchants considered better placed to bear a modest charge to attract MDR.The government also defended the differential treatment of UPI and RuPay debit cards, arguing that the two payment systems operate through distinct technological architectures, commercial arrangements and cost structures.It said the continued zero-MDR regime for RuPay advances the policy objective of promoting a domestic card network.Centre says MDR does not violate merchants' rightsThe Centre further argued that the revised framework does not impose an unreasonable restriction on merchants' right to carry on business under Article 19(1)(g).It said the Constitution does not guarantee that commercial infrastructure must remain free of cost and that a charge which reduces a merchant's profit margin does not, by itself, amount to a violation of fundamental rights. The government also pointed out that merchants cannot pass on MDR charges to consumers.Addressing the allegation that the charges amount to an unauthorised levy, the Centre said MDR is neither a tax nor a fee imposed by the government.Instead, it described MDR as a “commercial payment deducted from a merchant's settlement under its arrangement with the acquiring bank”.The government said its role was limited to determining which electronic payment modes would remain exempt from charges under Section 10A of the Payment and Settlement Systems Act, 2007.Commercial arrangements for transactions outside the exemption, including the determination of MDR, fall within the domain of the National Payments Corporation of India (NPCI), which operates UPI under authorisation from the Reserve Bank of India (RBI).According to the Centre, NPCI determines the applicable charges and their distribution among participants in the payment ecosystem.Since the government neither fixes nor collects MDR, Article 265 of the Constitution, which prohibits the levy or collection of taxes without the authority of law, does not apply in this case, the affidavit stated.Centre cites ₹8,730 crore in subsidiesDefending the economic rationale behind the revised framework, the government said the zero-MDR regime did not eliminate the cost of processing digital payments but merely shifted the financial burden to the government and other participants in the payment ecosystem.The Centre said it had disbursed ₹8,730 crore in incentives to acquiring banks between 2021-22 and 2024-25 to support zero-MDR transactions.However, citing reports of Parliamentary Standing Committees, it argued that these subsidies covered only a fraction of the estimated annual operating costs of the UPI ecosystem, which it placed at around ₹20,700 crore.The government said a “sustainable funding model” was necessary to support investments in cybersecurity, fraud prevention, dispute resolution, technological development and the expansion of digital payment infrastructure.Most UPI transactions to remain unaffectedThe Centre maintained that the revised framework would leave the overwhelming majority of UPI transactions unaffected.It said person-to-person (P2P) transactions would continue to remain exempt irrespective of their value. Person-to-merchant (P2M) transactions of up to ₹2,000 would also attract zero MDR.Additionally, transactions involving small merchants receiving up to ₹1 lakh a month through UPI QR codes would remain exempt from the proposed charges.The government also defended the legislative route adopted to introduce the revised framework. It argued that the amendment to Section 10A was validly passed as part of a Money Bill, as it had a direct bearing on government expenditure from the Consolidated Fund, given the subsidies previously provided to sustain zero-MDR transactions.What the UPI MDR case is before the Supreme CourtIn September 2026, while hearing the PIL filed by Anjan Datta challenging the revised MDR framework, the Supreme Court declined to stay its implementation. It issued notices to the Union government and NPCI, seeking their responses.The revised MDR framework was initially scheduled to come into effect on October 15, 2026. NPCI subsequently deferred its implementation.On November 3, NPCI also filed its counter-affidavit before the Supreme Court, defending the proposed charges.NPCI argued that MDR would apply to only a small fraction of P2M transactions, with around 96% of such transactions remaining unaffected under the revised framework.It also rejected the petitioner's apprehension that the charges could lead merchants to increase prices, describing the concern as misplaced.