A parliamentary panel has urged the government to swiftly implement a calibrated Merchant Discount Rate (MDR) on high-value digital transactions, asserting that such a framework is critical for the financial sustainability of the payments ecosystem and to alleviate the government’s subsidy burden. This recommendation follows recent legislative action where Parliament cleared amendments to the Payment and Settlement Systems Act, 2007.
The recent amendments, passed earlier this week, empower the government to permit banks and other payment service providers to levy charges on transactions conducted via the Unified Payments Interface (UPI) and other electronic payment methods designated by the Centre. This legislative change specifically removes the prior legal restriction that prevented these entities from imposing an MDR on certain digital payment modes. The government’s intention behind this move is to introduce a nominal charge on select digital payments involving consumers and small businesses, thereby establishing a viable revenue model for banks, payment service providers (PSPs), and the infrastructure companies that underpin India’s digital payments landscape.
The proposed changes specifically target Section 10A of the Payment and Settlement Systems Act, 2007, which previously barred financial institutions from charging for electronic payments. Furthermore, the legislation modifies its linkage with Section 269SU of the Income Tax Act, which mandates businesses with an annual turnover exceeding Rs 50 crore to accept payments through specified electronic means, including RuPay debit cards and BHIM-UPI QR codes. For more in-depth information, readers can refer to the original report.
In its report presented to Parliament on Wednesday, the Standing Committee on Finance also pressed the Department of Financial Services, under the Ministry of Finance, to evaluate the long-term financial viability of existing defined-benefit and incentive-based schemes. The Committee noted that the current incentive program promoting RuPay Debit Cards and low-value BHIM-UPI transactions, which includes a budgetary allocation of Rs 2,000 crore to offset losses from the zero-MDR regime, unnecessarily inflates the Department’s Demand for Grants. This allocation, the committee highlighted, covers only about 10 percent of the industry’s actual operating costs.
Previously, the Committee had advised the Department to explore a self-sustaining, tiered revenue model to ensure the long-term health of the payments ecosystem without perpetually burdening the exchequer. The report confirmed that, in response to this earlier recommendation for a sustainable revenue framework, legislative provisions enabling a tiered MDR structure have since been introduced.
Despite these legal advancements, the Committee, led by senior BJP leader Bhartruhari Mahtab, voiced concern over the significant disparity between the Rs 2,000 crore budgetary support and the industry’s estimated operational expenditure of Rs 20,700 crore. The report emphasized that while the necessary legal framework for a calibrated MDR on high-value transactions is now in place, any delay in its notification and implementation would leave payment service providers reliant on insufficient government aid. This, in turn, could adversely impact crucial investments in cybersecurity, fraud prevention, and the overall payment network infrastructure, all vital components of robust Business operations.
Consequently, the Committee reiterated its recommendation to expedite the implementation of a self-reliant, tiered revenue framework for higher-value merchant transactions. This approach aims to protect small merchants and person-to-person (P2P) transfers, thereby guiding the digital payments ecosystem towards a self-sustaining model.
