UPI Fees Won't Pass To Customers, No Extra GST Burden For Merchants: Sources

For millions of Indians, paying by UPI has become almost automatic. Scan the QR code, enter the amount and walk away. But from October 15, a new cost will enter the system for some higher-value UPI payments.

The Modi government, however, does not want that cost to reach customers. Hence, the Centre is collaborating with payment aggregators to ensure that merchants do not pass the charges (Merchant Discount Rate) on transactions to end customers. Banks have also been instructed to ensure and the compliance will be monitored on a daily basis from October 15, sources told NDTV. 

UPI Fee: What Changes From October 15?

Under the new framework, a 0.4 per cent MDR will apply to specified person-to-merchant UPI transactions above Rs 2,000.

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The charge will be paid by the merchant, not the customer. It will be capped at Rs 300 for transactions of Rs 75,000 and above. UPI payments between individuals will remain free.

Most everyday UPI payments will also remain outside the new charge. Person-to-merchant (P2M) transactions up to Rs 2,000 account for more than 95 per cent of P2M transaction volume and will continue to attract zero MDR.

This means someone buying a Rs 1,500 item from a shop through UPI will not suddenly face a new UPI fee. The bigger change will be felt in higher-value merchant payments.

Centre Wants Merchants To Absorb The UPI Fee

The government's concern is simple. If merchants start adding a separate "UPI charge" to bills, customers could feel that UPI is no longer free. That could undermine one of the biggest advantages of digital payments.

The Centre has, therefore, started discussions with payment aggregators and other platforms to ensure the MDR is not passed on to consumers. Banks have also been advised to ensure that merchants do not transfer the cost.

The government has not, however, publicly detailed exactly how this daily monitoring will work.

Will UPI Users Return To Cash?

The government does not expect the new MDR to push people back towards cash. Officials estimate that only around 4 per cent of UPI transaction volume will be affected by the new levy. That is because the overwhelming majority of UPI payments are small-value transactions.

NPCI data shows that in August, 86 per cent of P2M UPI transactions were below Rs 500 and another 10 per cent were between Rs 501 and Rs 2,000. So the new MDR is primarily aimed at a relatively small portion of higher-value merchant transactions.

RuPay debit card payments will also remain free irrespective of the transaction amount, giving merchants and consumers another digital payment option.

No Separate GST Burden For Eligible Merchants

Another concern was whether the new MDR would bring an additional GST burden for businesses. Government officials said merchants will not face a separate GST burden on the underlying UPI transaction.

Instead, 18 per cent GST applies to the MDR itself. For example, if a merchant receives Rs 10,000 through an eligible UPI transaction, the 0.4 per cent MDR would be Rs 40. GST at 18 per cent on that MDR would add Rs 7.20.

Eligible GST-registered businesses can claim input tax credit for the GST paid on the MDR, subject to the applicable conditions.

This means the GST paid on the MDR can be set off against the merchant's output GST liability. The government has also indicated that the GST implications could be discussed by the GST Council.

But For Merchants, The Cost Still Matters

While consumers are being shielded from the MDR, merchants will still have to account for the new cost. And that is where the economics of the new system could become important.

Consider a Rs 10,000 transaction. At 0.4 per cent, the MDR works out to Rs 40. That may sound small in isolation. But for a business operating on a thin margin, repeated deductions can add up.

Ashish Chandra, Founder & CEO, GFF AI PTE. LTD., Singapore, told NDTV that the bigger question for merchants will be whether the fee creates enough value in return. "UPI's next test is not simply whether merchants can be charged a fee, but whether they can clearly see the value that fee creates. A merchant fee is legitimate only when businesses can verify that they are receiving a more reliable, secure and useful payment service in return."

He added, "At 0.4 per cent for eligible UPI merchant transactions above Rs 2,000, the proposed charge may appear modest, but its impact can be significant for businesses operating on thin margins. A Rs 40 fee on a Rs 10,000 transaction, for instance, represents 20 per cent of the profit on a sale made at a 2 per cent net margin. This makes transparency around costs, exemptions and settlement deductions particularly important."

What Happens If A Merchant Adds A UPI Surcharge?

A merchant cannot simply show one price and then add a separate UPI charge at the payment counter.

Union Minister for Communications Jyotiraditya M Scindia on Wednesday made it clear that any attempt by merchants to pass the cost of MDR on UPI transactions to customers would violate the law and constitute a criminal offence

Why Is The Government Introducing UPI MDR?

The government says the move is aimed at creating a more sustainable revenue framework for India's digital payments ecosystem. UPI has grown massively while remaining free for users and, until now, largely free of MDR for merchants.

The Department of Financial Services said the move was intended, among other things, to create a revenue model that could allow more domestic players to operate in the UPI ecosystem. The government has also argued that completely subsidising the payment system indefinitely may not be enough to support innovation and competition.

Meanwhile, the Finance Ministry has also rejected allegations that the new MDR was introduced because of pressure from the US.