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

Q. Examine the fiscal and financial-inclusion trade-offs involved in introducing a Merchant Discount Rate on UPI transactions in India. (15 marks, 250-350 words)

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.

(~330 words)

Sources: 1. The Taxation and Other Laws (Amendment) Bill, 2026 — PRS Legislative Research — Bill amends Payment and Settlement Systems Act, 2007; introduced in Lok Sabha on 4 August 2026 2. Cabinet approves Incentive Scheme for promotion of low-value BHIM-UPI transactions (P2M) — PIB — 0.15% incentive rate, transactions up to ₹2,000, small-merchant coverage and limited outlay 3. RBI approves record ₹2.86 lakh crore surplus transfer to Central Government for FY 2025-26 — Akashvani News (Prasar Bharati) — record surplus transfer, 6.7% rise over previous year 4. UPI recognised as world's largest real-time payment system by IMF — PIB — UPI's scale in global real-time payments 5. DFS releases "Socio-Economic Impact Analysis of Incentive Scheme for Promotion of RuPay Debit Card and low-value BHIM-UPI Transactions (P2M)" — PIB — scheme's small-merchant adoption and financial-inclusion objective