The government has created legal space to impose taxes on the electronic payment system it promoted for a decade. An amendment in the Taxation and Other Laws (Amendment) Bill, 2026, to Section 10A of the Payment and Settlement Systems Act, 2007, would permit charges on certain digital payment methods. Officials propose a Merchant Discount Rate of 0.25 to 0.5 percent on UPI transfers exceeding 2,000 rupees. This change would affect roughly five percent of transactions by volume but about 65 percent by value.
The measure contradicts earlier efforts to encourage cashless payments. Demonetisation in 2016 aimed to reduce cash use, and UPI, introduced that year, benefited from a zero-MDR policy to shift merchants and users away from cash. UPI volumes have since grown rapidly. The new proposal would apply fees to larger transfers after years of subsidies for digital adoption.
India already applies 18 percent GST to credit card interest and fees. The pattern indicates inconsistent treatment across payment types. Taxing observed transactions may reflect a broader approach rather than a unified payments strategy.
Economic analysis shows that the party legally responsible for a tax may not bear its full cost in a two-sided market like UPI. Merchants would face the MDR through banks and the National Payments Corporation of India, yet competition among providers could lead banks and payment service firms to absorb the expense. This outcome might reduce funds available for system improvements, fraud controls, and outreach to new users.
UPI has supported financial inclusion by converting informal activity into digital records usable for credit assessment. Fees on the system could discourage adoption and slow progress toward formalisation goals. Usage decisions should reflect costs and preferences of businesses and consumers rather than repeated policy shifts. The proposal targets higher-value transfers but may still alter overall behaviour.
