SC leaves UPI MDR framework untouched, seeks responses

The Supreme Court on Friday declined to halt the implementation of the new Merchant Discount Rate (MDR) framework for certain UPI merchant payments scheduled to take effect on October 15.

The court, however, issued notices to the Centre, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) on a petition challenging the policy.

A bench led by Chief Justice of India Surya Kant, along with Justices Joymalya Bagchi and V. Mohana, directed the respondents to submit their replies within four weeks. The court also asked them to clarify the legal basis and nature of the MDR levy.

The petition, filed by advocate Anjan Datta, contests the Centre’s September 14 notification and the MDR framework announced a day later. It argues that the decision to impose MDR on selected UPI merchant transactions lacks a clear legal foundation and raises concerns over the manner of its introduction.

Under the revised rules, specified person-to-merchant (P2M) UPI transactions exceeding Rs 2,000 will attract an MDR of 0.4%, subject to a maximum charge of Rs 300. UPI payments of up to Rs 2,000 and all person-to-person (P2P) transfers will continue to remain free.

The framework also introduces a flat Rs 5 MDR on eligible transactions above Rs 2,000 in sectors such as railways, telecom, insurance, fuel and agricultural inputs. For mutual funds, securities, brokers and dealers, the MDR has been fixed at 0.02%, with a cap of Rs 300.

The Finance Ministry has stated that the revised MDR structure will impact only about 4% of merchant UPI transactions, while the remaining 96% will continue without charges. It has also clarified that MDR is not a tax and is shared among stakeholders in the payments ecosystem rather than being collected by the government or NPCI.

The ministry further said merchants will not be allowed to pass the MDR cost on to customers, while small businesses receiving up to Rs 1 lakh per month through UPI will continue to enjoy zero-MDR benefits.

The reintroduction of MDR has nevertheless triggered a debate among merchants and the payments industry. The All India Mobile Retailers Association (AIMRA) has announced a “No UPI Day” on October 2, with the industry body arguing that the new charge could add to the costs of retailers operating on thin margins.

The Head and Tale recently went behind the new MDR framework to break down how the charge works, who pays it, where the money flows, what each participant in the payments chain stands to earn and what it could mean for banks, fintechs, payment apps and merchants. Read our deep dive.