The 0.4% Question: Who Really Pays for UPI?

On 28 September 2026, the Chief Justice of India, Surya Kant, presiding over a bench that included Justice Joymalya Bagchi, was handed a question that sounds small and is not. A public interest litigant, advocate Anjan Datta, wanted the Supreme Court to stop a 0.4 per cent charge on certain UPI payments to merchants from taking effect on 15 October. The bench declined to stay it. But it did something more interesting than refusing: it asked who would actually earn the money, and whether the charge was a fee or a form of tax. It also told the Centre to file an affidavit within four weeks explaining the basis for the decision. Those two questions are, in my view, the whole case. The charge itself is a commercial detail. The real issue is who is allowed to decide what India pays to move its own money, and how much explaining they owe us before they do.

My argument is simple, and I will make it without pretending the other side has no case. A merchant fee on high-value UPI payments may well be defensible as economics. It is much harder to defend as law and as governance in the way it has been introduced. A payment system that reaches nearly every Indian household should not have its price set through a chain of circulars and press releases, resting on a statutory power that says almost nothing about how it must be used. If the Centre can justify the fee, it should be able to do so in the open, with numbers, and with limits written down before the first rupee is collected rather than after.

Start with what is actually changing, because the popular version of this story is muddier than the real one. From 15 October, a merchant discount rate, or MDR, of 0.4 per cent will apply to specified person-to-merchant UPI transactions above ₹2,000, capped at ₹300 for payments of ₹75,000 and above. A flat ₹5 will apply to certain essential sectors, and 0.02 per cent to capital-market payments. Person-to-person transfers stay free. So do merchant payments up to ₹2,000, and merchants who receive up to ₹1 lakh a month through UPI are exempt altogether. The government’s lawyer told the court that about 96 per cent of merchant transactions would be unaffected. That is a striking number, and if it holds, this is a narrow measure rather than a tax on the whole digital economy.

To see why it still matters, you need the history. Since January 2020, MDR on UPI and RuPay debit card payments has been zero, a policy written into Section 10A of the Payment and Settlement Systems Act, 2007, and linked to Section 269SU of the Income-tax Act. Zero was not an accident of design. It was a promise, made to persuade shopkeepers, vegetable sellers and chai stall owners to accept a QR code instead of cash, and it worked spectacularly. According to figures reported this year, UPI handled roughly 241.6 billion transactions worth about ₹314 lakh crore in the last financial year, and July 2026 alone set a record of about 23.7 billion transactions. Nobody builds a system that size on a whim. They build it on the belief that it will stay cheap.

The government’s case for change is not frivolous, and it deserves to be stated fairly. Someone pays for the servers, the fraud monitoring, the dispute resolution and the bank infrastructure behind those billions of payments. In March 2026, the Department of Financial Services told Parliament’s Standing Committee on Finance that the absence of MDR “makes the UPI ecosystem financially unsustainable.” The Centre had set aside ₹2,000 crore to compensate the industry for lost revenue, but the parliamentary panel noted that this covers only around 11 per cent of the industry’s actual costs. Put plainly, the “free” in free UPI has always meant that taxpayers and banks were footing the bill quietly.

This is where the strongest counterargument to my position lives, and I want to give it its due. The American jurist Oliver Wendell Holmes Jr. wrote in a 1927 dissent, in Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, that “Taxes are what we pay for civilized society.” Applied loosely to this dispute, the thought is that shared infrastructure has to be paid for by someone, that pretending otherwise is a kind of fiction, and that asking larger merchants to contribute a fraction of a per cent on bigger payments is more honest than hiding the cost in a subsidy. I find that argument genuinely persuasive as a matter of policy. A system that is free only because the true cost is concealed is a system that eventually breaks, and it usually breaks at the worst moment.

But notice what Holmes was actually talking about. He was talking about taxes, levied by a legislature, under authority a court could examine. The uncomfortable feature of the UPI charge is that even the bench in the Supreme Court appears unsure what to call it. When the Chief Justice’s bench asked whether this was a fee or a tax, it was not being rhetorical. The distinction is basic to Indian constitutional law. A tax must be authorised by a law passed by a competent legislature, under Article 265 no tax can be levied or collected except by authority of law. A fee, by contrast, is supposed to be charged in return for a service, and the person paying it should get something for the money. A charge that is set by a coordinating body, borne by merchants, and shared among banks and payment providers does not sit neatly in either box. That ambiguity is not a technicality. It is the difference between a charge that can be tested against constitutional limits and one that quietly escapes them.

Which brings us to how the rate was actually fixed. In August 2026, Parliament passed the Taxation and Other Laws (Amendment) Act, which rewrote Section 10A. The old provision flatly barred MDR on the specified payment modes. The new one lets the government decide which modes stay protected. Under the new arrangement, a gazette notification dated 14 September, according to one report that examined it closely, removed the protection from certain UPI payments without fixing any rate at all. The figure of 0.4 per cent surfaces in an NPCI circular and a government press release dated 15 September. If that reading is right, the number that will now be deducted from millions of merchant payments does not live in a statute or in a gazetted rule. It lives in a circular.

This is the heart of the delegation objection that the petitioner has raised. Indian courts have long accepted that Parliament cannot write every detail of every regulation, and delegation of rule-making is a normal and necessary part of modern government. But the settled position is that a legislature must lay down the policy and the guiding standards, and cannot hand the executive an open-ended power to do as it thinks fit. Mr Datta’s complaint is that Section 10A as amended offers no formula, no ceiling and no criteria for deciding which payments stay free and which do not. He also points out that the court has not been shown a published cost study, and that nothing explains why ₹2,000 is the threshold or ₹1 lakh the monthly exemption line. Those are fair questions. If the numbers were derived with care, the affidavit due in four weeks is the chance to show the working. If they were set by negotiation and instinct, better that we learn it now.

There is a second unease, and it is about trust rather than statute. In June 2025, when reports circulated that MDR might return on UPI payments above ₹3,000, the Finance Ministry called those claims “completely false, baseless, and misleading.” Sixteen months later, a version of the very thing that was denied is about to begin. Governments are entitled to change their minds, and circumstances do change. But when a policy was publicly ruled out and then arrives by circular, citizens are entitled to ask what changed, and to expect a proper answer. The March 2026 statement to the Standing Committee suggests the thinking was already moving. If so, the 2025 denial was at best incomplete. Trust in a payment system is an asset, and it is one that erodes fastest when people feel they were told one thing while another was being prepared.

The petitioner also raises a point that I think deserves more attention than it has received: the treatment of UPI and RuPay debit cards. Payments through RuPay debit cards continue to enjoy zero-MDR protection without any monetary ceiling, while UPI payments above ₹2,000 are now exposed to the charge. Two instruments that ordinary people use interchangeably at the same shop counter are being treated differently, and the reason has not been fully explained. The answer may lie in the economics of card networks versus account-to-account transfers. But an answer that has to be reverse-engineered by commentators is not the same as an answer given by the state. Equal treatment of like payments is a principle that regulators, too, should be able to defend with reasons.

Then there is the human end of all this, which is where policy debates tend to be won or lost. The All India Mobile Retailers Association has announced a “No UPI Day” for 2 October, on which its members plan to cover their QR codes with black cloth and ask customers to pay another way. The association estimates that a small retailer moving ₹5 lakh to ₹30 lakh a month through UPI could lose between ₹2,000 and ₹12,000 a month, and puts the burden on small mobile retailers at around ₹500 crore a year. Those figures are the association’s own and have not been independently validated, so they should be read as a claim rather than a fact. Yet the anger is real, and petrol dealers in Maharashtra and traders in Madhya Pradesh are reportedly organising in similar ways. A thin-margin shop selling phones on a slim profit will not shrug off a fraction of a per cent. And here the petitioner’s sharpest practical worry comes into focus: that low-margin traders may respond by nudging customers toward cash, or by splitting one large payment into several smaller ones to stay under the threshold. That would defeat the point of the policy and quietly push people back toward the very cash economy UPI helped us leave.

It is fair to ask whether I am being unreasonable. After all, the court refused to stay the charge, and the government’s data suggests most merchants will not notice it. The bench described the issue, as one report put it, as being less legal and more technical, and there is something to that. Courts are rightly cautious about halting a payments rollout that a regulator and an operator say they need. Interim orders in economic policy are not lightly given. But refusing to stay a measure is not the same as approving it. The bench has kept the door open by demanding the affidavit, and the eventual full hearing is where the real questions about delegation, classification and equality of treatment will be tested. Nothing about the interim order settles them.

What should a sensible resolution look like? I would suggest three things, none of them radical. First, whatever rate applies should be stated in a rule or notification with legal force, published in the gazette, rather than sitting in a circular that most people will never read. Second, the government should publish the cost study behind the rate and the thresholds, or explain plainly why it cannot. Third, there should be a defined review point, so that a charge introduced as narrow does not widen quietly, one adjustment at a time, into something that reaches the ordinary shopper. None of this would prevent the fee from happening. It would simply make it accountable, which is what a fee that touches this many lives ought to be.

There is a broader lesson for lawyers, compliance officers and business owners, too, beyond the fate of this one petition. If you run a business that accepts digital payments, your unit economics have just acquired a new variable, and it may keep moving. Contracts with customers, pricing policies, invoicing terms and platform agreements should now be read with one question in mind: who absorbs a change in payment costs, and can it be passed on? The government has said merchants cannot pass the charge on to consumers, and the petitioner has questioned whether that is enforceable in practice. Until that gets tested, careful businesses will model both outcomes. For lawyers, the lesson is different: the drafting of delegated powers is where the next generation of public-law disputes will be fought, and it will not be fought loudly.

India built something extraordinary in UPI, and it did so partly by making a promise that cost real money to keep. The state is now entitled to say that the promise has become too expensive, and there is honest economic evidence on its side. What it is not entitled to do, if constitutional government means anything, is to change the terms through a mechanism that most citizens cannot see, under a power that sets no limits, without showing its arithmetic. The Supreme Court has asked the right question: who earns, and is it a fee or a tax? If the Centre answers it well, in an affidavit filed in the open, the fee may well survive, and deserve to. If it cannot, then the problem was never 0.4 per cent. It was that the price of a nation’s payments was decided where nobody could argue with it.