The Supreme Court on Monday decided not to put a stop to the government’s plan to implement a merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions exceeding Rs 2,000, scheduled to begin on October 15. This decision comes amidst a public interest litigation presented by advocate Anjan Datta, calling into question the notification issued by the Centre on September 14 and related guidelines announced a day later.

The introduction of a 0.4 per cent fee on transactions over Rs 2,000 marks the end of a nearly six-year period of free UPI transactions for this category. Smaller payments and person-to-person transactions will remain exempt from this charge, according to the new regulations. The court has requested responses from the Centre, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) within four weeks.

Govt’s Position on UPI Charges

During the proceedings, Additional Solicitor General N Venkataraman, representing the government, informed the bench that 96 per cent of UPI users would be exempt from the new charges. He stated, “The Government of India is not taking even a single rupee out of it.” The bench, comprising Chief Justice Surya Kant and Justices Joymalya Bagchi and V Mohana, requested the Centre to provide a detailed affidavit explaining the rationale behind enforcing fees on larger transactions.

Venkataraman further explained that MDR for essential services is set at a maximum of Rs 5, clarifying that this fee is neither a tax nor a regular fee. The court noted the importance of gathering all relevant facts through a concise affidavit to facilitate a better understanding of the situation, suggesting that the matter is more technical than legal.

The bench posed several questions regarding the legal basis for the charge, including whether it qualifies as a tax or a fee. Venkataraman countered any suggestion of expropriation, stating that the charges constituted a settlement fee between payment aggregators and banks and insisted that the government is not directly involved in the transactions.

Petitioner’s Concerns Over MDR Framework

The public interest litigation challenges the constitutionality of the amended Section 10A of the Payment and Settlement Systems Act, 2007. The petitioner alleges that the regulations grant excessive powers to the executive, allowing them to determine which electronic payment methods will remain exempt from charges.

The plea calls for a declaration that no MDR or similar compulsory fee should be imposed without a formally authorised statutory instrument. Moreover, the petitioner raises concerns regarding the distinction made between UPI transactions and RuPay debit card payments, as the latter continues to enjoy no-charge protection without limits.

This disparity has led to claims of arbitrariness and discrimination, particularly affecting merchants with thin profit margins and raising fears of potential indirect consumer burdens and digital exclusion. In its request, the petition seeks either the cancellation or suspension of the MDR framework for UPI transactions exceeding Rs 2,000. Alternatively, it calls for a reconsideration of the rules following transparent public consultations, empirical studies, impact assessments, and protections for small and micro-enterprises.

The petitioner urges that future MDR classifications consider relevant factors, eliminating abrupt measures not backed by evidence. In summary, while the Supreme Court has chosen not to suspend the upcoming MDR regime, it has prompted the Centre, RBI, and NPCI to clarify the legal and technical foundations of their decision amid ongoing challenges to the impact of the new charges on UPI transaction dynamics.

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