The Supreme Court is scheduled to hear on Monday a public interest litigation challenging the Centre’s decision to permit a Merchant Discount Rate (MDR) on specified Unified Payments Interface (UPI) person-to-merchant transactions above ₹2,000.
The plea, filed by advocate Anjan Datta, challenges the Centre’s September 14 notification and the MDR framework announced on September 15. The framework is scheduled to take effect from October 15.
According to the Supreme Court’s cause list for September 28, the matter is listed before Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana.
The litigation comes after the government ended the nearly six-year period in which UPI transactions were free of MDR. Under the new framework, a 0.4% MDR will apply to specified person-to-merchant payments above ₹2,000.
The government has, however, retained zero charges for person-to-person transactions and payments up to ₹2,000, while providing separate treatment for small merchants and certain sectors. The Finance Ministry has said the new framework leaves about 96% of merchant transactions unaffected.
What the new UPI fee framework provides
For general person-to-merchant transactions above ₹2,000, the MDR has been fixed at 0.4%. It will be capped at ₹300 for payments of ₹75,000 and above.
Transactions above ₹2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will instead attract a flat MDR of ₹5 per transaction.
Payments relating to mutual funds, securities, stockbrokers and dealers will carry a lower MDR of 0.02%, with the charge capped at ₹300 per transaction.
The government has also specified that MDR is a charge within the merchant payment ecosystem rather than a fee collected by the government or the National Payments Corporation of India (NPCI). The amount is to be distributed among participants such as banks, payment service providers and UPI application providers.
Person-to-person UPI transfers will continue to be free irrespective of the amount involved. The government said such transactions account for about 70% of the total value of UPI transactions and remain outside the MDR framework.
Payments to merchants up to ₹2,000 will also remain free. Small merchants receiving up to ₹1 lakh a month through UPI QR codes under the person-to-person-merchant category will continue to receive zero-MDR treatment.
The Centre has said banks have been advised to ensure that merchants do not pass the MDR on to customers, while UPI application providers are barred from imposing platform fees or hidden charges.
The government has also proposed a dedicated fund for small merchants, with 5% of total MDR collections to be contributed to it to encourage wider UPI adoption and continued usage.
What the Supreme Court plea challenges
Datta’s petition questions the legal basis and manner in which the new levy has been introduced, alleging that it lacks adequate statutory safeguards, transparency and public consultation.
The plea challenges the constitutional validity of the amended Section 10A of the Payment and Settlement Systems Act, 2007. It alleges that the provision gives the executive unguided powers to determine which electronic payment modes should receive protection from charges.
The petition has argued that no MDR or similar compulsory charge should be imposed merely on the basis of a press release or frequently asked questions in the absence of a duly authorised, authenticated and published statutory instrument.
It also questions the distinction between UPI and RuPay debit card transactions. According to the plea, the new notification continues the no-charge protection for RuPay debit cards without imposing a monetary ceiling.
The petitioner has described the framework as arbitrary and discriminatory and has raised concerns about its possible effect on merchants, particularly businesses operating on low margins. The plea also flags the possibility of indirect costs being passed on to consumers and concerns over digital exclusion.
The petition seeks quashing or suspension of the framework to the extent that it imposes MDR on UPI transactions above ₹2,000.
In the alternative, it seeks reconsideration of the framework following transparent consultation, publication of empirical data and an impact assessment, along with safeguards for micro and small enterprises.
The petitioner has further asked that any future MDR classification take into account factors such as merchant turnover, statutory MSME status, actual margins, geography and the ability of businesses to bear the cost, rather than imposing what it calls a cliff-edge treatment unsupported by evidence.
The Centre, the Reserve Bank of India and other authorities have been named as respondents.
The petition follows the government’s formal announcement of the revised framework on September 15. The Finance Ministry said the system was introduced under the Payment and Settlement Systems Act following deliberations by the UPI Steering Committee and was intended to support the long-term sustainability of the digital payments ecosystem.
Industry impact and concerns over market concentration
The MDR change has also prompted discussion about the economics of India’s rapidly expanding digital payments industry.
Reuters reported that PhonePe and Google Pay together accounted for about 80% of UPI payment values in August and cited Bernstein estimates that the new fee structure could generate up to $1.1 billion in annual revenue for payment apps by March 2028. Reuters reported that the two leading platforms could account for about $900 million of that amount based on their market share.
The report said the additional revenue could make expansion into rural markets more commercially viable for larger payment platforms, while smaller rivals may focus more heavily on higher-value transactions such as ticket bookings, business payments and utility bills.
The change has also renewed discussion about concentration in the UPI market. Reuters noted that NPCI has twice deferred a decision on a proposed 30% market-share cap.
At the merchant level, the new framework is intended to keep the MDR from being directly passed on to consumers. However, Reuters reported that some industry executives expect businesses could absorb the additional cost or potentially pass it on indirectly.
The government, meanwhile, has maintained that consumers will not be charged the MDR and that the overwhelming majority of merchant transactions will remain outside the new fee structure.
The Supreme Court’s hearing on Monday will therefore put the legal challenge to the new MDR regime before the court shortly before the October 15 implementation date.