The Supreme Court Won't Stay The UPI MDR Rollout, But Wants To Know What The Charge Is

The Supreme Court has declined to stay the 15 October rollout of merchant discount rate charges on higher-value UPI payments, while issuing notices to the Centre, the Reserve Bank of India and the National Payments Corporation of India.

A bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and V Mohana gave the respondents, who also include the UPI and Services Steering Committee, four weeks to file responses. The court asked for an explanation of the basis and legal character of the charge.

The petition, filed by advocate Anjan Datta through advocate Ashutosh Dubey, challenges the Centre's gazette notification of 14 September, issued under Section 10A of the Payment and Settlement Systems Act, 2007, and the framework announced the following day. It argues the framework is arbitrary and discriminatory, and was introduced without sufficient statutory safeguards, transparency or public consultation.

The framework applies 0.4 per cent to specified person-to-merchant transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above. Mutual fund, securities and stockbroker payments attract 0.02 per cent. Person-to-person transfers remain free, and merchants receiving up to ₹1 lakh a month are exempt.

Additional Solicitor General N Venkataraman told the court that MDR is neither a tax nor a fee, describing it as a settlement charge among banks and aggregators that NPCI facilitates, and said the government collects none of it. Around 96 per cent of merchant transactions are unaffected. The Chief Justice said the government should place those details on affidavit, and described the matter as appearing more technical than constitutional.

The framework ends a zero-MDR regime in place since 2020. UPI processed 24.51 billion transactions worth ₹29.82 lakh crore in August.

The exchange in court was more revealing than the order.

The Additional Solicitor General told the bench that MDR is not a tax and not a fee, but a settlement charge shared among banks and aggregators, with the government taking none of it. Justice Bagchi's response went straight to the difficulty: if it is not a fee, what is it? A charge of that kind, applied across a payment system used by most of the country, does not fit neatly into an existing legal category, and the court has asked the government to define it on affidavit rather than in argument.

That matters because the framework rests on an amendment. Parliament changed Section 10A of the Payment and Settlement Systems Act, which had barred banks and system providers from charging for UPI. The amendment gives the Centre power to specify which modes and thresholds remain exempt, and the Centre then set the UPI exemption at ₹2,000.

So the question in front of the court is not really whether 0.4 per cent is reasonable. It is whether a government can decide by notification which digital payments are free and which are not, and on what basis. The petition attacks the breadth of that power as much as the charge itself.

Declining a stay while asking that question is a considered position. The rollout proceeds, and the legal foundation gets examined in parallel.

The petitioner's sharpest argument is about the threshold rather than the principle.

A payment of ₹2,001 attracts the charge. A payment of ₹2,000 does not. That is a cliff rather than a slope, and cliffs change behaviour. A merchant near the line has an obvious incentive to split a transaction into two, and the petition argues the framework invites exactly that. It also questions how the ₹2,000 threshold and the ₹1 lakh monthly exemption were arrived at, noting the government has not published the data or method behind either.

The comparison with RuPay debit cards, which retain zero-charge protection with no ceiling at all, is the part the government will find hardest to answer on affidavit.

For the payments industry the economics are the point. Running the UPI ecosystem is estimated to cost around ₹20,000 crore a year, and it has been funded by government incentives and by banks absorbing the cost, because person-to-merchant UPI earned nothing. That is why NPCI has been preparing a framework to let AI agents make small UPI payments, and why the industry has lobbied for MDR for years.

What they are getting is narrow. Four per cent of merchant transactions, at 0.4 per cent, with a ₹300 cap. Against 24.51 billion monthly transactions the revenue is real, but it does not transform the economics of a system whose growth is overwhelmingly in small payments that remain free.

The more consequential question is the one the court actually asked. If the government can decide by notification which payment modes stay free and which do not, that power extends well beyond this threshold and this rate.

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