Examine the fiscal and financial-inclusion trade-offs involved in introducing a Merchant Discount Rate on UPI transactions in India.

The Taxation and Other Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 4 August 2026, amends the Payment and Settlement Systems Act, 2007, enabling the Centre to notify which digital payment modes may carry a Merchant Discount Rate (MDR) [1]. This reopens a genuine trade-off between fiscal sustainability and inclusion.

Fiscal case for MDR

• Under the zero-MDR regime operative since 2020, the running cost of UPI is absorbed by banks and NPCI, with no revenue stream against rapidly rising volumes.
• Budgetary support only partly offsets this: the incentive scheme for low-value BHIM-UPI (P2M) transactions pays 0.15% per transaction up to ₹2,000 for small merchants against a limited annual outlay [2]. Subsidy grows arithmetically; transactions grow exponentially.
• A user-pays model would free recurring fiscal space and give banks an incentive to invest in capacity, uptime and fraud control.

Fiscal case against

• Affordability is a policy choice, not a constraint. The RBI's surplus transfer to the Centre reached a record ₹2.86 lakh crore in FY2025-26, up 6.7% year-on-year [3] — the platform's cost is a small fraction of this.
• Digital payments generate an auditable trail aiding formalisation and tax buoyancy; a charge that pushes transactions back to cash erodes that indirect fiscal gain.

Financial-inclusion trade-off

• Zero cost was central to scale — UPI is now recognised as the world's largest real-time payment system, accounting for a large share of global real-time transactions [4].
• MDR is a per-transaction cut on already thin margins of small and street merchants, whose adoption the incentive scheme was designed to deepen [5]; many may revert to cash.
• Merchants typically pass costs to consumers, disadvantaging low-income users and diluting JAM-linked inclusion gains.

A calibrated path resolves the tension: continue statutory exemption for small-merchant and low-value transactions, permit MDR only on large merchants and high-value payments, and fund the residual gap through budgetary support. Treating UPI as digital public infrastructure — a public good with priced premium layers — sustains both the exchequer and inclusive growth.