The government on Thursday firmly refuted the charge that introducing Merchant Discount Rate (MDR) charges on select UPI transactions was driven by pressure from the US Trade Representative (USTR), and stated that the rationale behind the move was to make the Indian payment ecosystem financially sustainable and create room for new players.
The GST Council could also look at whether any residual issues remain regarding GST on MDR, as much of the tax incidence is either likely to be offset through input tax credit or not applicable to smaller businesses, sources said.
The clarification on MDR comes amid allegations that the decision to reintroduce charges on select UPI transactions was influenced by pressure from the USTR.
“The allegation that MDR has been introduced under any external influence is patently false and misleading,” the Department of Financial Services (DFS) said.
The USTR, in its 2026 report, flagged the inability of US electronic payment services suppliers to participate in the UPI ecosystem, including credit transactions on UPI, on a level playing field with RuPay.
“The NPCI circular of 15.9.2026 does not allow credit transactions on UPI by any other credit card other than the RuPay credit card. There is a clear policy of only allowing RuPay credit card on UPI to enable RuPay credit cards to become the preferred choice of credit cards amongst users in India,” the DFS said. There is no MDR on RuPay debit cards while other debit cards levy MDR up to 0.9%.
The USTR had also flagged NPCI’s market-share limitation of 30% for third-party application providers, announced in November 2020, with enforcement scheduled for December 2026.
On this, the DFS said: “Although NPCI had mandated a market share limitation of 30% for third-party application providers in November 2020, this mandate could not be implemented because companies other than the market leaders could not compete in the absence of a self-sustaining revenue model.”
“Introduction of MDR on select high-value transactions will provide a self-sustaining revenue model to smaller companies to compete for a higher share in the UPI ecosystem. Thus, introduction of MDR has been done with the intention of allowing more domestic companies to expand their operations.”
Besides other likely new players entering the fray, the government plans to aggressively push BHIM UPI, developed by the National Payments Corporation of India (NPCI), to expand its market share from a little less than 1% now.
Currently, two American firms, PhonePe (45.64%) and Google Pay (32.26%), together account for close to 80% of UPI transaction volume. Sources said that if the market share of these two firms does not fall below the 30% mandated threshold for a single player, fresh onboarding of customers on these platforms may be stopped at an appropriate time.
Under the new framework, UPI transactions between individuals will remain completely free, while merchant payments of up to Rs 2,000 will also continue to attract zero MDR. A 0.4% MDR will apply to specified person-to-merchant transactions above Rs 2,000, with certain categories, such as capital market transactions and essential services, receiving lower or fixed rates. The government has said about 96% of P2M transactions will remain unaffected.
With MDR likely to make the UPI ecosystem self-sustainable, the government may save the Rs 2,000 crore subsidy earmarked for FY27, as the subsidy will be discontinued, sources said.
The 0.4% rate, according to the explanation, was arrived at after examining MDR levels in other countries, where charges were broadly in the 0.3-0.6% range. The per-transaction cost of providing the UPI service is estimated at around Rs 1.38.
The other issue under examination is the 18% GST applicable to MDR. A significant part of the concern could be mitigated because GST-registered businesses can generally claim input tax credit on eligible business expenses. At the same time, many smaller businesses below the applicable GST registration thresholds of Rs 40 lakh for goods and Rs 20 lakh for services would not be registered taxpayers and therefore would not face the same tax incidence.
The GST Council could therefore examine whether any residual issues remain, including cases where input tax credit is unavailable or where the additional tax burden could have a disproportionate impact, sources said.
Payment aggregators are also being approached to ensure that MDR is not passed on to customers or imposed directly on merchants in a manner inconsistent with the framework. The government expects the limited MDR regime to support the sustainability of UPI without encouraging a shift back to cash or reducing digital payments.
UPI’s scale has expanded sharply, with NPCI data showing 24.5 billion transactions in August 2026 alone, underlining the size of the ecosystem that the new revenue model is intended to sustain.