SC questions govt.’s power to levy UPI merchant fees

1. At a Glance

• The Supreme Court has questioned the Union government's legal authority to impose a 0.4% Merchant Discount Rate (MDR) on Person-to-Merchant (P2M) UPI transactions above ₹2,000 [1].
• The core legal question is what the levy is. If it is neither a tax nor a fee, the Court wants to know what executive power allows this "expropriation" from merchants [1].
• It brings together digital payments policy (GS-III) and constitutional limits on executive levies (GS-II), including Art. 265, the tax–fee distinction and the separation of powers.
• The policy stakes: the petitioner argues the levy could push people back to cash and revive black money [1].

2. Why in the News

• 28 Sept 2026 (Monday): a three-judge Bench headed by CJI Surya Kant issued notice to the Union of India, RBI and NPCI on a petition challenging UPI MDR charges [1].
• The challenge is to the 14 September 2026 notification. The MDR takes effect from 15 October 2026 [1].
• The Court refused repeated pleas for an interim stay from petitioner Anjan Datta [1].
• Justice Joymalya Bagchi asked the Centre to explain in an affidavit the "character" of the charge. His words: "If it is not a tax or fee, what is the executive scope of making this expropriation?" [1]
• Additional Solicitor General N. Venkataraman appeared for the Centre [1].

3. Background & Evolution

• UPI is operated by NPCI, which is an umbrella body for retail payments promoted under RBI and IBA auspices [BG – verify].
• MDR is the fee a merchant pays, per transaction, to the banks and payment intermediaries that process digital payments [BG – verify].
• Finance (No. 2) Act, 2019 inserted Section 269SU of the Income-tax Act and Section 10A of the Payment and Settlement Systems Act, 2007. Together these barred MDR on prescribed modes, including UPI and RuPay debit cards, with effect from 1 January 2020 ("zero-MDR regime") [BG – verify].
• Since then the Centre has compensated banks through a UPI incentive scheme for low-value P2M transactions, instead of letting them charge MDR [BG – verify].
• 14 Sept 2026: a notification introduced 0.4% MDR on P2M UPI transactions above ₹2,000. This is a partial reversal of the zero-MDR policy [1].
• 28 Sept 2026: the SC issued notice and declined an interim stay [1].

4. Core Static Facts

Key terms:

• Tax: a compulsory exaction for public purposes, with no direct quid pro quo [BG – verify].
• Fee: a charge for a specific service, with a broad quid pro quo [BG – verify].
• MDR: a commercial charge on the merchant for payment processing [BG – verify].

5. Multi-Dimensional Analysis

Legal / Constitutional

• The Court's framing: the notification must fit a recognised legal category (tax or fee). Otherwise it looks like an executive "expropriation" with no legal basis [1].
• If it is a tax, Art. 265 requires the authority of a law passed by the legislature. Executive notifications cannot create a tax without statutory delegation [BG – verify].
• If it is a fee, a service must be rendered in return (quid pro quo). If it is a private commercial charge, the question becomes how the State can mandate or prescribe it.
• It may conflict with the statutory zero-MDR mandate (Sec. 269SU of the IT Act and Sec. 10A of the PSS Act) unless those provisions were amended or the notification was issued under them [BG – verify].

Economic

• The ₹2,000 threshold appears designed to protect small-ticket payments while making larger transactions fund the ecosystem [1].
• The petitioner argues it could cause a reversion to cash and more black money [1].
• Banks and payment apps have long argued that zero MDR makes UPI commercially unviable and deters investment in infrastructure [BG – verify].

Social

• Small and medium merchants will bear the cost directly, and may pass it on to consumers or refuse UPI above ₹2,000.
• There is a risk to financial inclusion gains built on free UPI.

Governance / Administrative

• Three bodies are involved: the Union (policy), RBI (regulator) and NPCI (operator) [1]. This raises the question of who is accountable for pricing public digital infrastructure.
• Refusing an interim stay reflects judicial restraint on economic policy. The Court is still testing whether the government had the vires to issue the notification [1].

Technological

• UPI is a flagship of India's Digital Public Infrastructure (DPI). Pricing decisions shape whether it stays a "public good" or becomes a commercial service.

6. Recent Developments (last 12–18 months)

• 14 Sept 2026: notification introducing 0.4% MDR on P2M UPI transactions above ₹2,000 [1].
• 28 Sept 2026: SC issued notice to the Union, RBI and NPCI, refused an interim stay, and sought an affidavit on the legal character of the levy [1].
• 15 Oct 2026: MDR scheduled to come into force [1].

7. Prelims Hooks

• The UPI MDR rate notified in 2026 is 0.4% [1].
• It applies only to Person-to-Merchant (P2M), not P2P, transactions [1].
• The threshold is transactions above ₹2,000 [1].
• The notification is dated 14 September 2026 [1].
• The MDR is effective from 15 October 2026 [1].
• The SC Bench was a three-judge Bench headed by CJI Surya Kant [1].
• The respondents are the Union of India, RBI and NPCI [1].
• The SC did not stay the notification [1].
• Operator of UPI: NPCI, not RBI directly [BG – verify].
• Zero MDR on UPI and RuPay debit cards has applied since 1 Jan 2020, under Sec. 10A of the PSS Act, 2007 and Sec. 269SU of the IT Act [BG – verify].
• Art. 265 says no tax without authority of law. It sits in Part XII, not Part III [BG – verify].
• Art. 300A covers the right to property as a constitutional right, not a fundamental right, since the 44th Amendment, 1978 [BG – verify].

8. Can a Notification Undo What Parliament Wrote Into Law?

• Zero MDR on UPI comes from an Act of Parliament, not from a policy choice
• Since January 2020, MDR on BHIM-UPI and RuPay debit cards has been zero. This was done by amending Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [2].
• An executive notification sits lower than an Act. It can fill in details that an Act allows. It cannot switch off a rule that the Act itself lays down.

• So if the 14 Sept 2026 notification was not backed by an amendment to these two sections, it may be ultra vires (beyond the legal power of the body that issued it) [1][2].

• Why Justice Bagchi's 'tax or fee' question matters

• If the 0.4% is a tax, Article 265 (no tax without the authority of law) needs a law passed by the legislature. A notification alone is not enough.
• If it is a fee, the government must show a service it gives the merchant in return (quid pro quo, meaning 'something for something').

• MDR is normally a charge the merchant pays to banks and payment companies. If that is the case here, the State is forcing one private party to pay another. That is why the Court used the word "expropriation" (taking someone's property) [1].

• The government has set UPI charges before, but in a different way

• The Department of Financial Services (DFS) once directed public sector banks, "in public interest", not to charge more for IMPS and UPI than they charged for NEFT [7].
• That order put a ceiling on what banks could charge customers. This notification puts a new charge on merchants. The first protects the payer. The second takes money from the payer. That is why the question of legal power is sharper now.

9. Why ₹2,000 Is an Old Line, Not a New One

• The State has paid for small payments for years
• Before zero MDR became law, the Cabinet approved subsidising MDR on debit card, BHIM-UPI and AePS payments below ₹2,000 [6].

• Gazette notifications in 2018 and 2019 paid banks back for these charges on payments up to ₹2,000 [5].

• The 2024-25 scheme left one group unpaid

• Small merchants, payments up to ₹2,000: zero MDR, plus a 0.15% incentive paid by the government [2].
• Small merchants, payments above ₹2,000: zero MDR and no incentive [2].
• Large merchants: zero MDR and no incentive on any payment [2].

• The whole scheme cost ₹1,500 crore for one year [2].

• The new 0.4% falls on exactly the unpaid group

• Banks and apps earned nothing from any source on P2M payments above ₹2,000 [2].
• The 14 Sept notification puts the 0.4% MDR on these same payments [1].

• So the policy logic is clear: pay for this band through the merchant, not the Budget. The open question is who has the legal power to decide that.

• Where the money goes is itself a chain

• Under the incentive scheme the government pays the acquiring bank (the merchant's bank). That bank shares the money with the customer's bank, the payment service provider bank and apps like third-party UPI apps [3].
• An MDR would probably move the same way. The difference is that the merchant pays, not the taxpayer.

10. The Government's Strongest Case — and Where It Falls Short

• The case for the charge
• UPI costs money to run, and zero MDR means banks earn nothing on most merchant payments [2].
• RBI's own Discussion Paper on Charges in Payment Systems (August 2022) said charges should be reasonable and set by competition, but must also give intermediaries 'optimal revenue' [5].
• The ₹2,000 limit keeps small payments free. Tea stalls and vegetable sellers are untouched [1].

• Paying for UPI from the Budget every year (₹1,500 crore in 2024-25) is a lasting cost to the taxpayer [2].

• What this case gets right

• Someone must pay for UPI. Either the taxpayer or the user. Pretending it is free does not make it free.

• A charge only on bigger payments is a fair way to share that cost.

• Where it falls short

• The Court is not asking whether MDR is good policy. It is asking who has the power to bring it in [1]. Good policy made by the wrong authority is still invalid.
• RBI chose a public consultation in 2022 before touching charges [5]. No such open process is reported for this notification [1].
• The government itself called claims of GST on UPI payments above ₹2,000 "completely false" in 2025 [4]. A 0.4% charge on the same payments, brought in by notification, makes it harder to hold public trust.
• The petitioner says merchants may push buyers back to cash [1]. A merchant can avoid 0.4% just by asking for cash. That weakens the digital trail that the zero-MDR law was made to build [2].

11. What Each Authority Should Do Now

• Parliament should decide, not a notification
• Zero MDR was made law by amending Sec. 10A of the PSS Act and Sec. 269SU of the IT Act [2].

• If the government wants MDR back, the clean route is to amend these same sections in Parliament. This would answer the Article 265 and 'authority of law' question directly.

• RBI should consult before pricing changes

• RBI's 2022 Discussion Paper sought public comments before changing any payment charge [5].

• The same step — publishing the cost data and asking merchants, banks and apps — should come before the 0.4% takes effect.

• DFS should publish the evidence

• DFS released a Socio-Economic Impact Analysis of the RuPay and low-value BHIM-UPI incentive scheme in 2026 [8].

• Its findings on who gained from zero MDR should be placed before the Court. They would show whether a 0.4% charge risks the gains in digital payments.

• Separate small merchants from large ones

• The 2024-25 scheme already treated small and large merchants differently [2].

• A charge only on large merchants, or on payments above ₹2,000 made at large merchants, would protect small shopkeepers. These are the people most likely to go back to cash.

• The Centre should state plainly what the charge is

• The Court has asked for an affidavit on the "character" of the charge [1].
• The Centre must say clearly whether it is a tax, a fee or a commercial price, and name the law behind it. Without this, the notification cannot be defended.

12. Anchors for Answers

• Data: ₹1,500 crore — outlay for the Incentive Scheme for low-value BHIM-UPI (P2M) transactions, FY 2024-25; 0.15% incentive on small-merchant payments up to ₹2,000 [2]
• Report/Committee: RBI Discussion Paper on Charges in Payment Systems, August 2022 [5]; DFS Socio-Economic Impact Analysis of the RuPay and low-value BHIM-UPI incentive scheme, 2026 [8]
• Law/Case: Sec. 10A, Payment and Settlement Systems Act, 2007, and Sec. 269SU, Income-tax Act, 1961 — zero MDR since January 2020 [2]; Article 265 (no tax without authority of law); Article 300A (no deprivation of property without authority of law)
• Scheme: Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M) — the Budget pays banks so merchants do not pay MDR; the other way to fund UPI [2][3]

13. Mains Relevance

• GS-II: Separation of powers; judiciary; limits of executive action and delegated legislation.
• GS-III: Indian economy, including mobilisation of resources, banking, digital payments and infrastructure.

Possible question stems:

1. 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. (GS-II, 15 marks)
2. 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. (GS-III, 15 marks)
3. Digital Public Infrastructure should be priced as a public good. Discuss in the Indian context. (GS-III, 10 marks)

14. Related Topics to Study Next

• Payment and Settlement Systems Act, 2007: the statute under which RBI regulates payment systems and which contains the zero-MDR clause.
• NPCI structure and role: the operator named as a respondent; also runs RuPay, IMPS and others.
• Tax vs fee jurisprudence (e.g., Shirur Mutt, 1954): the doctrinal basis of the Court's question.
• Art. 265 and Art. 300A: the constitutional limits on exactions and on deprivation of property.
• Delegated legislation and excessive delegation: tests the vires of the notification.
• Digital Public Infrastructure (India Stack): puts UPI pricing in the DPI policy context.
• Demonetisation (2016) and the cash-to-digital shift: linked to the petitioner's black money argument.
• UPI incentive scheme for low-value P2M transactions: the fiscal alternative to MDR.

15. Common Errors / Trap Areas

• P2M vs P2P: the 0.4% MDR applies only to P2M transactions above ₹2,000, not to all UPI payments [1].
• Notification vs effective date: the notification is dated 14 Sept; the levy applies from 15 Oct 2026 [1].
• The SC did not stay the levy. It only issued notice and asked for an affidavit [1].
• NPCI ≠ RBI: NPCI operates UPI and RBI regulates it. Both, along with the Union, are separate respondents [1].
• MDR is not GST or a tax in ordinary usage. That is exactly why the Court asked what the charge legally is [1].