FM Nirmala Sitharaman rejects UPI MDR 'misconception,' says charge won't be passed to consumers

The Merchant Discount Rate (MDR) on UPI payments above Rs 2,000 will not be passed on to customers, Union Finance Minister Nirmala Sitharaman said, ruling out any burden on consumers even as the finance ministry moves to engage banks and traders' bodies to ensure the charge does not filter down the chain.

"This is not a tax, this is not a cess, and it is not even a surcharge. The collection is not going to the Consolidated Fund of India. So, let us first understand that this is not a government issue. The MDR is being charged by NPCI, the aggregator, the service provider, those who provide the POS machines, and the merchant bank. They are the ones providing the service. Above Rs 2,000, the merchant is the one who will pay. That money is not coming to the Government of India, and we are not imposing it. And this will not be passed on to the customer," Sitharaman told PTI.

Also read: 'Retailers likely to pass UPI MDR to consumers'


She dismissed opposition allegations over the charge as a "complete misconception." "Today, the opposition is levelling allegations against the government without fully understanding the issue. I wish to clarify, so that both traders and citizens are well-informed that this is neither a tax nor a cess. We are not imposing a surcharge, and the funds collected from this will not go into the government's coffers or treasury," she said, adding that the 0.4% charge on transactions above Rs 2,000 is a decision mutually agreed upon by banks providing POS machines, QR service providers and collecting banks, with the proceeds shared among NPCI, banks, POS machine providers and merchant banks.

Sitharaman drew a comparison with card payments to make her case. "Even now, traders accept various cards: Visa, debit, or credit cards, on which an MDR is applicable, yet this cost is not passed on to the customer. For instance, if you purchase an item worth Rs 5,000, the bill reflects that exact amount plus GST, of course, but the MDR is not added to it. Traders do not charge the consumer the MDR for other cards, similarly, the cost here will not be passed on to the consumer either. Since this system helps grow their business, the merchants and bankers handle these arrangements among themselves; the government plays no role in this process. If they do not pass the cost on to the consumer for other cards, why would they do so in this instance?" she told PTI.

Asked whether customers had reason to worry, Sitharaman said the concern was misplaced. "I don't think customers are worried because we are clearly saying that this is not going to the consumer. There are, of course, I'm sorry to say, people who have not understood this properly... It is not on the consumer. The MDR charge on above Rs 2,000 payment is on the merchant banker, who is already doing it for other cards. And with the other cards also, they are not passing it on to the consumer. There may be many things they do in terms of giving offers or whatever. So, strictly speaking, this is being applied to many other cards. I am justifying it from that point of view. I am saying it is not a tax, it is not a cess, it is not a surcharge, and the collection is not coming to the Government of India at all."

Ministry steps in to enforce the message

Even as the finance minister makes the case publicly, the ministry is working to ensure the message holds on the ground. It will reach out to the Indian Banks Association (IBA) to ensure MDR charges are not passed on to consumers, and officials will also meet traders' bodies to address their concerns over the levy, ET Bureau reported, citing government officials.

Also read: Ministry of Finnace to engage with banks and traders to allay Merchant Discount Rate concerns

"We would talk to the IBA about the execution... Their members operate the POS machines," an official said, adding that bringing MDR onto UPI is in line with a recommendation from a parliamentary panel that includes opposition members. Apprehensions that consumers could shift back to cash because of merchant fees on UPI are misplaced, the official said, according to the report.

As part of this outreach, the IBA will run an awareness campaign to dispel misconceptions about the MDR, which is already levied on card transactions, including on Mastercard, Visa and American Express, ET Bureau reported. RuPay debit transactions remain exempt from MDR.

Whether MDR itself will attract GST is still open

While the government has been firm that the MDR is not a tax or cess, a separate question, whether the charge should itself attract GST, remains under discussion. The GST Council could examine whether an 18% tax should apply on MDR charged on UPI transactions above Rs 2,000, officials told ET Bureau.

"We expect the Council to be more inclined to be reasonable on this and take a favourable decision as this concerns the common man," an official said, adding that no formal proposal on any tax rate change is on the agenda for the October 7 GST Council meeting, which will focus mainly on procedural relaxations.

The MDR framework

The National Payments Corporation of India (NPCI) notified a 0.4% MDR on person-to-merchant (P2M) UPI transactions above Rs 2,000, effective October 15, capped at Rs 300 for transactions of Rs 75,000 and above.

Transactions up to Rs 2,000 and all person-to-person UPI transfers remain exempt, and merchants with monthly P2M UPI collections below Rs 1 lakh will also not attract the charge.

The government does not impose the MDR, which is neither a tax nor a cess, an official told ET Bureau, and the amount will be shared among banks and other entities in the UPI ecosystem, with the government receiving nothing from it.

The subsidy the government provides to payment service providers has not been sufficient, the official added, and these charges are needed to help the fintech ecosystem develop further.