Trade bodies call the new merchant charge a “backdoor burden” and argue that businesses may ultimately factor the cost into consumer prices; government maintains the MDR is not a tax and customers must not be charged
Mumbai: The Chamber of Associations of Maharashtra Industry and Trade (CAMIT) and the All India Electronics Association (AIEA) have opposed the newly announced 0.4% Merchant Discount Rate (MDR) on certain Unified Payments Interface (UPI) merchant transactions above ₹2,000, warning that the additional payment-processing cost could hit businesses operating on thin margins and discourage digital transactions. In a statement, CAMIT Honorary Secretary and AIEA National General Secretary Mitesh Mody urged the Union Government to withdraw the new charge, describing it as an indirect burden that businesses may eventually be forced to absorb or factor into their pricing.
The new framework, which is scheduled to take effect from October 15, applies a 0.4% MDR to eligible person-to-merchant (P2M) UPI transactions above ₹2,000. The MDR is capped at ₹300 per transaction once the payment reaches ₹75,000. Person-to-person (P2P) transactions will continue to remain free. Small merchants receiving up to ₹1 lakh a month through qualifying UPI QR-code transactions will also remain outside the MDR framework. The government says this means around 96% of merchant UPI transactions will continue without MDR.
Trade Bodies Fear Cost Will Ultimately Reach Consumers
CAMIT and AIEA disputed the assumption that the charge would remain confined to merchants. “This is not a burden on merchants alone; every such cost imposed on businesses ultimately flows down to the end user,” Mody said. The associations argued that wholesale and distribution businesses in several sectors work with margins of around 2% to 2.5%, making an additional payment-processing cost of 0.4% commercially significant. According to Mody, traders operating on such margins may prefer alternative payment modes rather than absorb the MDR themselves.
The associations also linked their opposition to a wider concern over the cumulative cost of doing business, citing municipal levies, professional tax, Agricultural Produce Market Committee (APMC) cess, banking charges, tolls, parking charges and other statutory or service-related payments. Invoking the Goods and Services Tax (GST) slogan of “One Nation, One Tax”, Mody argued that businesses continue to encounter numerous additional levies and charges despite the introduction of GST.
Government Says MDR Is Not a Tax
The Union Ministry of Finance, however, has specifically clarified that the 0.4% MDR is not a tax and is not collected as government revenue. According to the ministry, MDR represents a payment-system charge distributed among participants in the UPI ecosystem, including banks, payment service providers and UPI application providers, with the objective of financing infrastructure, cybersecurity, operations and continued expansion of the payment network. The government has also maintained that customers should not be charged MDR for making UPI payments and has advised banks to ensure that merchants do not pass the transaction-specific charge directly to consumers. That distinction, however, does not address the trade associations’ broader argument that businesses could indirectly recover higher operating costs through product pricing.
GST Applies Only to MDR, Not Entire UPI Payment
Another distinction is important. An 18% GST will apply to the MDR charged by the payment service provider, and not to the entire value of the UPI transaction. For example, on an eligible ₹10,000 UPI payment, the 0.4% MDR would be ₹40. GST at 18% on that ₹40 charge would amount to ₹7.20, taking the immediate payment-processing cost to ₹47.20. However, businesses registered under GST can claim the GST component paid on the MDR as input tax credit, according to a Finance Ministry official. Consequently, the ₹7.20 GST component in this example may be creditable, subject to normal GST rules, while the ₹40 MDR itself remains the merchant’s cost. Unregistered businesses that fall outside the GST system would not have the same input-credit mechanism, although many smaller merchants are separately protected by the zero-MDR threshold.
‘Will Traders Continue Using UPI?’
CAMIT and AIEA nevertheless contend that the fundamental commercial question remains the MDR itself. “If a wholesaler is earning only 2% to 2.5% margin, how can he absorb another 0.4% transaction cost from his own pocket?” Mody asked. The associations warned that merchants dealing in higher-value transactions could begin encouraging bank transfers, cheques, cash or other payment mechanisms instead of accepting UPI if the additional MDR materially affects their margins. They said such an outcome would run contrary to years of government efforts encouraging businesses and citizens to migrate towards digital payments. CAMIT and AIEA have therefore urged the Centre to reconsider the MDR framework, particularly for businesses operating on narrow margins, arguing that the long-term sustainability of the UPI ecosystem should not come at the cost of discouraging merchants from using it.
