The Indian government’s decision to reintroduce a Merchant Discount Rate (MDR) on UPI transactions has drawn sharp criticism from retail and apparel industry bodies, who warn the timing—just as the festive shopping season begins—could push small merchants back toward cash payments and undermine years of digital payment adoption.
Under the new framework, a 0.4 per cent MDR will apply to person-to-merchant UPI transactions above Rs 2,000, capped at Rs 300 for transactions of Rs 75,000 and above. While consumers remain exempt from the charge, the cost falls entirely on merchants—a group that industry representatives say is already operating on thin margins.
Clothing Manufacturers Flag Festive Season Timing
Santosh Katariya, President of the Clothing Manufacturers Association of India (CMAI), said the timing of the move was particularly difficult for an industry gearing up for its busiest sales period.
“Introducing MDR on UPI at the start of festive season could not have come at a more challenging time for the industry. This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins. Adding another cost to digital transactions at this juncture risks putting further pressure on an ecosystem that is still finding its footing. UPI has been a powerful enabler of consumption and formalization and any move that increases the cost of acceptance needs to be carefully calibrated, particularly during the most important sales period of the year.”
RAI Warns of a Return to Cash
The Retailers Association of India (RAI) has raised similar concerns, cautioning that the charge risks reversing progress made in digital payment adoption among India’s smallest retailers.
Kumar Rajagopalan, CEO of RAI, said the fee creates a direct incentive for merchants to steer transactions away from UPI during the festive rush, when a large share of purchases cross the Rs 2,000 threshold.
“Small merchants will now think twice about whether to accept cash or UPI,” he said. “During the festive season, a large share of transactions crosses the Rs 2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance.”
RAI argues that every transaction pushed back into cash represents a loss to the formal economy, working against the government’s own digitisation and GST-reporting goals.
“This cuts against the government’s own formalisation agenda. UPI acceptance should be incentivised, not taxed.”
The association also objected to treating all UPI transactions uniformly, noting that most UPI payments draw directly from a savings or current account and function like debit transactions—carrying none of the interchange cost or credit risk associated with credit networks.
“We don’t see the case for charging a bank-to-bank UPI payment the way you’d charge for credit. Where UPI is linked to a credit line, a fee is easier to defend, because the cost structure genuinely resembles a credit product. We urge that the government should bear the cost of normal UPI transactions since it repays the government with GST and traceable transactions instead of cash transactions.”
Rajagopalan extended the argument to who should ultimately bear the cost of running the UPI infrastructure itself.
“NPCI keeps UPI running for the entire country — RBI or the government should be underwriting that cost, not merchants. The state gets a formal, traceable transaction it can tax out of every UPI payment. It should be paying for the enablement, not passing the bill down to the smallest retailer in the chain.”
RAI said it plans to raise the issue with the National Payments Corporation of India (NPCI) and the Ministry of Finance, advocating for a graded fee structure that distinguishes debit-linked UPI transactions from credit-linked ones, alongside incentives to keep small retailers within the formal payment system.
