Withdraw The Proposed UPI Fee

Under the proposed changes, specified UPI payments above ₹2,000 would attract a Merchant Discount Rate (MDR). The stated purpose is to fund the operation, security, and expansion of the system. But why should merchants bear this cost when banks, payment apps and the government benefit substantially from UPI?

An independent audit should establish and publish UPI’s actual running costs. The government, banks, National Payments Corporation of India (NPCI), and payment apps should then share these costs through a transparent funding arrangement. Institutions unwilling to participate should be free to opt out.

Banks, Apps Should Share UPI’s Costs

Banks save on handling cash and operating ATMs and branches when customers use UPI. Payment apps gain customers, spending data, and opportunities to sell loans, insurance, and mutual funds in a market serving more than 55 crore Indians. The government benefits from wider digital payments and greater visibility of economic transactions.

These benefits support the case for sharing UPI’s running costs. If these institutions fund the system, UPI can remain free and preserve its advantage over cards. Charging merchants reduces that advantage and creates commercial opportunities for competing payment networks.

US Firms Could Benefit

The US Trade Representative’s 2026 National Trade Estimate Report criticised India’s digital-payment rules as favouring domestic providers and sought a level playing field for US payment companies.

The commercial interests involved include Visa and Mastercard, as well as Walmart-linked PhonePe and Alphabet’s Google Pay. Visa and Mastercard could benefit when UPI loses part of its price advantage.

Free UPI allows merchants to receive the full payment. A merchant discount rate (MDR) reduces that benefit and could make cards more competitive. The card networks also seek access to UPI comparable to that enjoyed by RuPay credit cards.

PhonePe and Google Pay, which together handle more than 80% of UPI transactions, could earn a share of merchant fees if the fee-sharing arrangement provides for it. Their market dominance would give them a large potential base for such earnings.

These potential gains raise a question: why fund UPI through a model that weakens its competitive strength and advances US commercial interests when its beneficiaries could share the costs?

Exemptions Won’t Prevent Higher Prices

Exempting payments below ₹2,000 would protect those transactions from a direct fee, but it would not protect consumers from costs passed through shop prices and supply chains.

Shopkeepers may recover MDR on larger bills by raising prices across their shops. Maintaining different prices for the same product according to bill size or payment method is difficult.

Consider shirts priced at ₹500 each. Buying one attracts no UPI fee. Buying five creates a ₹2,500 bill and, at 0.4% MDR, a ₹10 fee. To recover fees on larger sales, the shopkeeper might raise the common price to ₹505. A customer buying one shirt would then pay ₹5 more despite making an exempt payment.

The same applies to groceries. A ₹2,500 bill may include a ₹2 oil sachet and a ₹10 biscuit packet alongside other staples. A retailer may spread payment costs across products, where permitted.

Small purchases could therefore become more expensive even when paid for in cash.

Supply-Chain Fees In Retail Prices

A packet of biscuits or a bag of wheat flour passes through several businesses before reaching the consumer. Farmers, processors, wholesalers, and retailers may all make payments that attract MDR.

Whenever an eligible payment attracts a fee, it adds to the cost at that stage. The next seller may pass on the added cost and calculate a margin on the higher amount. Repeated charges could therefore build through the supply chain.

Keeping small retail payments free does not remove costs already built into the product’s price. Someone buying a kilogram of flour, a ₹2 matchbox or a ₹10 biscuit packet in cash could still pay more.

The 18% GST on MDR adds another cost. Eligible GST-registered firms may claim input tax credit, but unregistered businesses and composition taxpayers cannot. For them, GST on the fee becomes an expense to absorb or pass on.

The ₹1 Lakh Threshold

Under the proposed classification rules, a small merchant account could become eligible for MDR when monthly UPI receipts exceed ₹1 lakh for three consecutive months. This threshold may appear high, but receipts are not profit.

At a 20% profit margin, monthly sales of ₹1 lakh leave only ₹20,000 for food, rent, electricity, school fees and other family expenses. A vendor relying mainly on UPI could cross the threshold while earning barely enough to support a household.

Crossing the threshold would not make every payment chargeable; MDR would apply to eligible transactions above ₹2,000. Even so, these charges could squeeze earnings already under pressure from higher supply-chain costs. Turnover sufficient for survival is not evidence that a business can afford another fee.

Collections In Personal Accounts

Using a personal account for business collections may not keep a vendor outside the merchant-classification system. Banks and payment platforms may identify accounts receiving frequent business payments from multiple individuals and classify them as Person-to-Person Merchant (P2PM) accounts.

If monthly UPI receipts exceed ₹1 lakh for three consecutive months, such an account may be reclassified as Person-to-Merchant (P2M). Eligible payments above ₹2,000 would then attract the proposed 0.4% MDR. Clear identification rules would be essential to distinguish business collections from genuine personal transfers.

Demand, Investment, Exports Could Weaken

Annual UPI payment value exceeded 91% of India’s GDP last year, indicating the system’s reach. The proposed fees could therefore affect the economy beyond the transactions directly charged.

Higher prices would leave households with less money for other purchases. Where competition prevents price increases, farmers, vendors and businesses would absorb the cost through lower earnings.

Weaker earnings and demand could lead firms to buy less stock, postpone investment and hire fewer workers. Some could reduce working hours or employment.

Exporters could also face higher input costs as suppliers pass on payment charges. Those unable to increase export prices could lose margins or orders.

Needed, Transparent Funding Model

India should withdraw the proposed 15 October changes, retain free UPI payments, and establish an independently audited funding model. Contributions should reflect the benefits received by banks, NPCI, payment apps, and the government.

India should also resist US pressure to weaken UPI, drawing on Brazil’s defence of Pix, its domestic digital-payment system. UPI’s affordability and widespread acceptance are economic strengths that India should preserve.

(Ajay Srivastava, a former Indian Trade Service Officer, is the founder of Global Trade Research Initiative, a New Delhi-based think tank. Views expressed are personal.)