The Centre on Thursday defended its decision to introduce Merchant Discount Rate (MDR) charges on certain Unified Payments Interface (UPI) transactions exceeding Rs 2,000, telling the Supreme Court that merchants had never been promised that digital payments would remain free indefinitely.
In a counter-affidavit filed on November 4, the Union government maintained that the revised MDR framework was developed after consultations with stakeholders and was necessary to ensure the financial sustainability of India's rapidly expanding digital payments infrastructure.
The government said the earlier zero-MDR arrangement was supported through public subsidies and did not create a permanent entitlement for merchants to receive payment-processing services without charges.
The submission came in response to a public interest litigation filed by advocate Anjan Datta challenging the revised framework on constitutional grounds.
𝗥𝘀 𝟮,𝟬𝟬𝟬 𝘁𝗵𝗿𝗲𝘀𝗵𝗼𝗹𝗱 𝗱𝗲𝗳𝗲𝗻𝗱𝗲𝗱
The Centre told the court that the decision to exempt merchant transactions of up to Rs 2,000 was intended to protect everyday retail payments and smaller businesses while allowing charges on certain higher-value transactions.
It argued that differentiating transactions according to their value, payment method and merchant category was constitutionally permissible because the classification served legitimate policy objectives.
According to the government, the framework balanced financial inclusion and affordability with the need to maintain a sustainable digital payments ecosystem.
The Centre also defended the continued exemption for RuPay debit card transactions, stating that RuPay and UPI operated through different technological and commercial arrangements.
It maintained that supporting RuPay's zero-MDR structure was consistent with the policy objective of promoting India's domestic card payment network.
𝗖𝗲𝗻𝘁𝗿𝗲 𝗿𝗲𝗷𝗲𝗰𝘁𝘀 𝗿𝗶𝗴𝗵𝘁𝘀 𝘃𝗶𝗼𝗹𝗮𝘁𝗶𝗼𝗻 𝗰𝗹𝗮𝗶𝗺
Responding to allegations that the revised framework violated Articles 14 and 19(1)(g) of the Constitution, the government argued that payment-processing charges did not amount to an unreasonable restriction on the right to conduct business.
It submitted that a reduction in merchants' profit margins arising from commercial transaction costs could not automatically be treated as a violation of fundamental rights.
The Centre further clarified that merchants would not be permitted to pass MDR charges directly to consumers.
It also rejected the contention that MDR constituted an unauthorised government levy, describing it as a commercial payment deducted from a merchant's settlement under arrangements with the acquiring bank.
The government said it neither fixed nor collected MDR, and that the determination and distribution of such charges fell within the responsibilities of the National Payments Corporation of India (NPCI).
Accordingly, it argued that Article 265 of the Constitution, which prohibits taxation without legal authority, was not applicable.
𝗥𝘀 𝟴,𝟳𝟯𝟬 𝗰𝗿𝗼𝗿𝗲 𝘀𝗽𝗲𝗻𝘁 𝗼𝗻 𝘀𝘂𝗯𝘀𝗶𝗱𝗶𝗲𝘀
Explaining the financial rationale behind the proposed charges, the Centre said it had disbursed Rs 8,730 crore in incentives to acquiring banks between 2021-22 and 2024-25 to support zero-MDR digital transactions.
However, the government argued that these subsidies covered only a portion of the estimated annual operating expenditure of the UPI ecosystem, which it placed at approximately Rs 20,700 crore.
It said the existing arrangement had not eliminated the cost of processing transactions but had instead shifted the burden to the government and other participants in the payments system.
The Centre maintained that a sustainable revenue mechanism was required to support cybersecurity, fraud prevention, dispute resolution, technological upgrades and the expansion of payment infrastructure.
𝗠𝗼𝘀𝘁 𝗨𝗣𝗜 𝗽𝗮𝘆𝗺𝗲𝗻𝘁𝘀 𝘁𝗼 𝗿𝗲𝗺𝗮𝗶𝗻 𝗳𝗿𝗲𝗲
The government said the revised framework would leave the overwhelming majority of UPI transactions unaffected.
Person-to-person transfers would continue to attract no MDR, irrespective of the transaction amount, while merchant payments of up to Rs 2,000 would also remain exempt.
Small merchants receiving up to Rs 1 lakh a month through UPI QR codes would continue to qualify for zero-MDR treatment.
Under the proposed structure, eligible merchant transactions above Rs 2,000 could attract MDR of up to 0.4 per cent, subject to applicable caps and sector-specific concessions.
The NPCI, in its affidavit filed on November 3, maintained that approximately 96 per cent of person-to-merchant transactions would remain outside the proposed charges.
It also argued that merchants could not transfer the charges to customers and that payment application providers were prohibited from imposing additional platform fees on UPI users.
𝗦𝘂𝗽𝗿𝗲𝗺𝗲 𝗖𝗼𝘂𝗿𝘁 𝗲𝘅𝗮𝗺𝗶𝗻𝗶𝗻𝗴 𝗳𝗿𝗮𝗺𝗲𝘄𝗼𝗿𝗸
The Supreme Court had issued notices to the Centre and NPCI in September while hearing the petition challenging the proposed charges.
Although the court declined to grant an interim stay, it sought responses concerning the legal basis and constitutional validity of the revised framework.
The charges were initially scheduled to take effect on October 15, but NPCI subsequently deferred their implementation.
The Centre has also defended the legislative process used to amend Section 10A of the Payment and Settlement Systems Act, 2007, arguing that the measure was validly introduced through a Money Bill because of its implications for government expenditure.
With the matter pending before the Supreme Court, the dispute centres on whether the proposed charges represent a permissible commercial arrangement to finance digital payment infrastructure or impose an unjustified burden on merchants.
The court has yet to deliver a final ruling on the validity of the revised framework.