The federal government has simply given itself the authorized room to tax the very cost behavior it spent a decade constructing. Tucked into the Taxation and Different Legal guidelines (Modification) Invoice, 2026, is an modification to Part 10A of the Fee and Settlement Techniques Act, 2007, which might enable the federal government to inform fees on specified digital cost modes. The quantity being proposed is a Service provider Low cost Fee (MDR) of 0.25–0.5% on UPI transactions above ₹2,000. The official stand is that this threshold would contact solely about 5 per cent of transactions by quantity, sparing the milk-and-vegetable funds that make up the majority of UPI’s use. However it will cowl roughly 65% of transaction worth, which is exactly why it issues.
This isn’t a small, technical repair. It runs counter to a decade-long coverage dedication and deserves extra scrutiny than it has obtained.
The coverage reversal
Think about the arc. Demonetisation in November 2016 was justified, amongst different issues, as a push in direction of a less-cash financial system. UPI, launched earlier that yr, turned the automobile for that push, and its zero-MDR regime was a deliberate subsidy to get retailers and customers off money. It labored spectacularly. UPI now processes extra transactions every month than many of the world’s card networks mixed. Having efficiently weaned the nation away from money and in direction of digital funds, the federal government now desires to undercut the very success it engineered.
There appears to be a continued sample of privileging one cost mode over others by way of coverage. India has lengthy taxed even bank cards. Bank card curiosity and costs entice 18% GST, making the usage of bank cards unnecessarily expensive. Taxing curiosity on revolving credit score is uncommon by worldwide requirements; most jurisdictions deal with client credit score curiosity as a personal monetary value, not a taxable service. India taxes it as if utilizing a bank card itself is a luxurious.
Now UPI, the cost rail the federal government spent political capital selling, is in line for comparable therapy. The sample suggests a necessity for a extra coherent funds coverage than giving in to the temptation to tax each transaction that may be noticed.
There are at the least two issues with this particular transfer past the optics.
Who actually pays?
First, primary financial concept tells us that the particular person on whom a tax is levied and the one who really bears its value are usually not at all times the identical. Furthermore, UPI or any funds interface is a two-sided market, and taxing two-sided markets is genuinely difficult.
The MDR would nominally fall on retailers, as argued by the federal government, collected by way of banks and the Nationwide Funds Company of India’s ecosystem. However whether or not that value will get handed by way of to retailers, on to customers, or absorbed by banks and cost service suppliers will depend on aggressive depth on all sides of the market. Banks and fintechs compete for service provider relationships and can’t simply elevate costs with out shedding quantity to a rival providing free UPI acceptance.
The extra possible consequence is that intermediaries — the banks and PSPs that constructed and preserve the plumbing — soak up the associated fee, which erodes their incentive to put money into reliability, fraud prevention and enlargement into underserved segments. A tax that can’t be reliably handed by way of doesn’t disappear; it almost certainly exhibits up later as degraded service or slower innovation. That is fully counterintuitive if authorities is proposing this tax as essential to fund the subsequent stage of UPI development.
Value to inclusion
Second, UPI has achieved actual work on monetary inclusion on the margin. It has pulled casual transactions right into a recorded, traceable digital path — the very consequence that formalisation and tax-compliance advocates have needed for years. There have additionally been makes an attempt to offer credit score based mostly on the digital path created by digital funds. Each rupee that strikes by way of UPI as a substitute of money is a rupee the monetary establishments can ultimately see and use to construct a spending profile.
Charging the rail straight may undercut the motivation to make use of it, slicing towards long-standing monetary inclusion objectives. The federal government doesn’t want to boost income from each rupee that strikes electronically; it wants these rupees to maintain shifting electronically, as a result of that’s what delivers the inclusion and compliance dividends it has been chasing since 2016.
Ideally, which cost mode to undertake needs to be an financial resolution for taking part actors. Components equivalent to the dimensions of the enterprise, client preferences, and relative value of utilizing different cost programs ought to decide their utilization. Deliberate coverage intervention and the present authorities’s struggle on money tilted the scales in favour of UPI. Taxing it now — nevertheless nominal or small — may change its utilization patterns, and policymakers shouldn’t be stunned if one consequence is decreased UPI utilization.
The proposal is being dressed up as a modest, focused measure affecting solely large-value transactions. However modest measures on cost rails have a means of increasing as soon as the authorized structure exists. Part 10A, as soon as amended, doesn’t expire when this explicit MDR proposal is shelved. The higher consequence is for the federal government to go away the funds system alone, let UPI’s community results maintain compounding, and discover its income elsewhere.
(Parag Waknis, Professor & Head, Economics Division, SRM College AP)
Printed – August 11, 2026 08:30 am IST
