Discuss the rationale and fiscal implications of India's zero-MDR policy on UPI transactions since 2020. Should Merchant Discount Rate be reintroduced?

Merchant Discount Rate (MDR) is the fee a merchant pays banks and payment networks per digital transaction. Since 1 January 2020, MDR on BHIM-UPI and RuPay debit cards has been zero, mandated through Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [1]. The Taxation and Other Laws (Amendment) Bill, 2026 has now reopened this settled question [2][3].

Rationale for zero-MDR

• Adoption at scale: removing merchant cost eliminated the last friction in onboarding small shopkeepers, helping UPI cross record monthly volumes [4].
• Financial inclusion: kiranas, street vendors and low-value P2M payments could digitise without margin loss, advancing the JAM and cashless-economy goals [1].
• Digital Public Infrastructure logic: UPI was treated as a public utility, like roads, where universal access outweighs user-fee recovery.
• Formalisation: a costless rail widened the audit trail, aiding tax compliance and credit access for MSMEs.

Fiscal implications

• The cost did not disappear; it shifted from merchants to the exchequer. Government compensates banks through an annual incentive scheme — an outlay of about ₹1,500 crore for FY 2024-25, paying 0.15% on P2M transactions up to ₹2,000 [1].
• This creates a recurring, volume-linked subsidy liability that grows as UPI grows — fiscally unsustainable at present trajectories.
• Banks and payment service providers bear unrecovered infrastructure, security and interoperability costs, thinning investment incentives.

Should MDR return? A calibrated, not blanket, reintroduction is defensible. Large merchants and high-value transactions can absorb a modest MDR, while small merchants and person-to-person transfers stay exempt — the design the Bill's enabling framework permits [2]. A flat levy risks merchant surcharging and reversal of hard-won inclusion gains [3].

India should therefore move from a fully taxpayer-funded model to a graded, ability-to-pay structure, protecting the small merchant while making the rail self-sustaining — preserving UPI as a public good and a durable fiscal commitment.