Government, banks to decide subsidy amount for UPI that will continue after MDR comes in

The Merchant Discount Rate (MDR) on UPI will not be enough to cover the cost of running and maintaining the payment platform, and so the government will soon hold discussions with the Indian Banks’ Association (IBA) to decide on what quantum of the ongoing government subsidy should continue and in what form, sources in the Ministry of Finance have confirmed.

The Ministry of Finance will also coordinate with the IBA on how to ensure that merchants do not pass on the MDR charge to customers. The MDR charge will go live on UPI on October 15, and there is no proposal to delay this date, the sources said. 

The government has budgeted ₹2,000 crore for the ongoing financial year under its incentive scheme for the promotion of RuPay Debit Cards and low-value BHIM-UPI transactions.

Coordination with banks, merchants

“The MDR amount that will be collected will not be enough to cover the full cost of UPI,” a senior official in the Ministry said on condition of anonymity. “As for the incentive the government is already providing, we will need to discuss with the IBA on how much should continue and how.”

“We will also be speaking to the IBA in the run-up to October 15 to work out ways in which it can be ensured that the merchants do not pass on the MDR to customers,” the official added. 

Separately, the Finance Ministry will also be speaking to traders and their umbrella body, the Confederation of All India Traders (CAIT), to explain the MDR charge to them and explain how most merchants will not be affected, and so should not stop accepting UPI. 

Issue for GST Council

Another official said that the Ministry of Finance could not “unilaterally” decide on the issue of a levy of Goods and Services Tax on the MDR amount collected by payment processors and banks from merchants. 

“UPI is a service, and the MDR is the charge for providing that service to merchants,” the second official explained. “As such, that service is taxed under GST. But it is for the GST Council to decide on the rate, how much, whether to exempt and all that. The Centre cannot unilaterally take those actions.”

The second official, however, clarified that the upcoming GST Council meeting on October 7 will be related to process reforms rather than “any sort of rate issue”. 

Also Read | Complex priorities: On UPI transactions, MDR charges

Petroleum deals problems

Both officials confirmed that the Ministry of Petroleum will be engaging with the petroleum dealers and their associations to work on their issues regarding MDR. The dealers’ associations have voiced their concerns about the charge and have asked for a waiver. 

“The MDR issue for the dealers is that it will impact their profit margins, and so they have used this as a reason to ask for a review of the margin amount that is decided by them and the Petroleum Ministry,” one of the officials explained. “The Petroleum Ministry will be taking this up with them.”

There is no proposal to waive MDR for them, the officials added.