The zero-MDR regime made UPI a global success but raised questions about financial sustainability. Critically evaluate the move to reintroduce MDR on high-value P2M transactions.

Since January 2020, the law has not allowed any Merchant Discount Rate (MDR) on UPI payments [3]. As a result, UPI has become the most preferred mode of payment, and 94% of small merchants now accept it [5]. A notification dated 14 September 2026 now levies 0.4% MDR on Person-to-Merchant (P2M) payments above ₹2,000 [1]. This makes economic sense, but its legal basis is weak.

Merits of the move

• Sustainability: Under zero MDR the taxpayer, not the user, pays for UPI. The incentive scheme alone cost ₹1,500 crore in FY 2024-25 [2].
• Fills a gap: Payments above ₹2,000 earned banks neither MDR nor an incentive [2]. The new charge falls on exactly this band.
• Targeted: Small-ticket payments at tea stalls and vegetable vendors are untouched [1].
• Regulatory logic: RBI's 2022 Discussion Paper said charges should be reasonable but should also give payment intermediaries an "optimal revenue stream" [4].

Concerns

• Legality: The Supreme Court asked whether the charge is a tax or a fee. If it is neither, it asked what executive power allows this "expropriation" [1]. Under Art. 265, a tax needs a law passed by the legislature. A notification also cannot override the statutory zero-MDR mandate (Sec. 10A, Payment and Settlement Systems Act; Sec. 269SU, Income-tax Act).
• Process deficit: RBI held a public consultation before changing payment charges [4]. No such consultation has been reported for this notification.
• Reversion to cash: A merchant can avoid the 0.4% simply by asking for cash. The petitioner warns this could revive black money [1].
• Trust deficit: In 2025 the government called claims of GST on UPI payments above ₹2,000 "completely false" [3]. A new charge on the same payments weakens its credibility.
• Burden on small merchants: The 2024-25 scheme treated small and large merchants differently [2]. A single ₹2,000 threshold ignores that difference.

Way forward

• Bring back MDR by amending the Acts in Parliament, not by notification.
• Hold an RBI-led consultation using published cost data.
• Apply MDR to large merchants only at first.
• Place the findings of the DFS impact study before the Court [5].

Overall, the question is not whether UPI must pay for itself but how that cost is imposed. The move is justified on economic grounds but flawed in its legal route and process. An MDR backed by legislation, preceded by consultation and differentiated by merchant size would keep UPI viable as public digital infrastructure. It would also respect Article 265's rule of "no exaction without authority of law" and protect the gains in financial inclusion.