Is a charge levied by executive notification without the character of a tax or fee constitutionally sustainable? Examine with reference to the recent challenge to UPI MDR.

A notification dated 14 September 2026 imposed a 0.4% Merchant Discount Rate (MDR) on Person-to-Merchant (P2M) UPI payments above ₹2,000. While hearing a challenge to it, the Supreme Court asked: "If it is not a tax or fee, what is the executive scope of making this expropriation?" [1]. A charge that is neither a tax nor a fee can stand only if a valid law made by Parliament authorises it.

Constitutional framework

• Article 265 says no tax may be levied except by authority of law. The executive cannot create a tax without power delegated by the legislature.
• Fee: a fee needs a quid pro quo, meaning a specific service given to the payer (the tax–fee distinction in Shirur Mutt, 1954).
• Article 300A says no one may be deprived of property save by authority of law. Here "law" means legislation, not an executive order.
• Delegated legislation must stay within its parent Act. A notification that overrides the Act is ultra vires (beyond legal power).

Why the UPI MDR notification is vulnerable

• Zero MDR is set by statute. Since January 2020 it has rested on amendments to Section 10A of the PSS Act, 2007 and Section 269SU of the Income-tax Act [2]. A notification cannot switch off these provisions.
• Not a tax or a fee. The money goes to banks and apps, not to the State. The State is compelling one private party to pay another, which is why the Court used the word "expropriation" [1].
• No consultation. RBI invited public comments before revising payment charges [3]. No such process is reported for this notification.

The Centre's possible defence

• Viability: the 2024-25 incentive scheme (₹1,500 crore) paid 0.15% only on small-merchant payments up to ₹2,000. Banks and apps earned nothing on payments above ₹2,000 [2].
• Precedent: the Department of Financial Services (DFS) once directed public sector banks to cap IMPS and UPI charges at NEFT rates [4]. However, capping a charge protects users, while imposing a new one needs clearer legal backing.
• Judicial restraint: the Court declined an interim stay [1].

Way forward

• Parliament should amend Section 10A and Section 269SU if MDR is to return.
• The Centre's affidavit should name the legal character of the charge and the law behind it [1].
• RBI should hold a public consultation first, and small merchants should be exempted to prevent a return to cash.

In sum, a charge with no statutory basis is hard to defend under Articles 265 and 300A. Recovering UPI's costs from larger payments may be sound policy, but it has to come through Parliament, not a notification. That keeps UPI financially sustainable and upholds the rule of law.