Industry bodies have raised concerns about the 0.4% UPI MDR's impact on small retailers, with the All India Consumer Products Distributors Federation (AICPDF) writing to Prime Minister Narendra Modi asking for the MDR to be reconsidered. AICPDF national president Dhairyashil H Patil stated that UPI is one of India's most significant indigenous technological achievements, but warned that the MDR will disproportionately affect India's millions of small retailers, distributors and other low-margin businesses. Retailers Association of India (RAI) confirmed that 80% of India's retail market consists of small and medium retailers, making them particularly vulnerable to the new charges. Most retailers' net profit margin is in the range of 2-3%, meaning the 0.4% MDR could mean a significant hit on their profits, as explained by Kumar Rajagopalan, RAI's chief executive officer.
The government has intensified its monitoring efforts to ensure merchants do not pass on new UPI charges to consumers, with daily monitoring to begin from October 15 when the 0.4% Merchant Discount Rate (MDR) on UPI transactions above ₹2,000 takes effect. According to The Times of India, 'From Oct 15, we will monitor on a daily basis whether merchants are passing the MDR to consumers,' finance ministry officials told reporters Thursday. The government is in talks with payment aggregators and platforms, which onboard merchants, to ensure that the merchant discount rate on transactions is not passed onto consumers, as confirmed by finance ministry officials. Currently, no legal framework exists to curb anti-profiteering related to this matter, highlighting the government's proactive approach to address potential consumer impact. The government will also charge 18% Goods & Services Tax (GST) on MDR, with businesses registered under GST able to claim input tax credit on the tax paid, as confirmed by government officials. The consultations come ahead of the introduction of a 0.4% MDR on UPI merchant transactions above ₹2,000 from October 15, with the government maintaining that merchants, rather than consumers, should bear the charge.
Small retailers are exploring various strategies to avoid the MDR impact, with industry leaders outlining multiple approaches. RAI's Kumar Rajagopalan explained that if a retailer takes half of its payments via UPI and the rest in cash, it still accounts for 0.2% of its net profit margin, which is around 10%. Retailers will look for various ways to avoid paying the MDR, including shifting to bank transfers, splitting transactions or passing on the cost to customers, according to industry experts. Shankar Thakkar from Confederation of All India Traders (CAIT) explained that retailers will either choose to split the transaction or find ways to pass it on to the customer by increasing the prices of unbranded products to cover the MDR cost. RAI also warned that retailers will look at competitive intensity in the areas they operate in and find ways to recover the cost from the customer, which also includes increasing the price tag of the item sold. The government and National Payments Corporation of India (NPCI) announced the new MDR framework on September 15, and it will come into effect from October 15.
The revised framework is expected to have a limited impact on overall UPI usage, with around 4% of merchant transactions expected to be affected. More than 95% of UPI person-to-merchant transactions will remain outside the MDR framework, as confirmed by government sources. Small merchants operating under the person-to-person-to-merchant (P2PM) model will continue to enjoy zero MDR, and UPI person-to-person transactions will remain free, meaning users can continue to transfer money to friends and family without an MDR charge. Under the revised structure, 5% of total MDR collections will be allocated to a dedicated fund aimed at supporting UPI acceptance among small merchants. The government expects that a major portion of merchant transactions will remain MDR free due to the attached caveats, with officials adding that UPI transaction volume is also unlikely to fall due to the MDR rollout. The Finance Ministry said that UPI processed 24.5 billion transactions in August 2026 alone, demonstrating the system's continued growth despite the new fee implementation.
The Finance Ministry contends that the introduction of MDR on select high-value transactions will enable more domestic companies to operate under UPI, directly addressing sovereignty concerns. 'Contrary to misleading claims made that MDR has been introduced under external pressure, the introduction of MDR on select high-value transactions will enable more domestic companies to operate under UPI. Thus, the action of introducing MDR is a step in protecting India's sovereignty in the electronic payment ecosystem', according to the government statement. The introduction of MDR has been done with the intention of allowing more domestic companies to expand their operations, with the government stating that with exponential transaction volumes, the system requires significant and continuous upgrades in cybersecurity, fraud prevention, and infrastructure. The MDR revenue will support areas including expansion of the network, cybersecurity and innovation, with the government emphasizing that with exponential transaction volumes, the system requires significant and continuous upgrades.
The government has definitively ruled out any revision of the 0.4% Merchant Discount Rate (MDR) levied on UPI transactions above ₹2,000, with government sources confirming there is 'no question of reversing it' when asked about potential withdrawal. According to The Times of India, the Centre asserted that it does not expect a decline in UPI transactions or increased use of cash following its decision to charge a 0.4% merchant fee on transactions above ₹2,000. The decision was taken in the broader interest of the UPI ecosystem and to strengthen its safety and security, with government officials emphasizing that 'the new MDR framework would make UPI financially self-sustainable'. The new charges are set to take effect from October 15, marking a significant escalation in the controversy surrounding India's digital payments infrastructure. The government has also clarified that the MDR rollout has not been implemented under any external pressure, directly addressing allegations that the MDR is aimed at addressing US concerns. The Department of Financial Services (DFS) also clarified this on Thursday, stating that 'few allegations are in the media that the MDR has been introduced because of external pressure'. Officials also argued that there will be no GST burden on merchants after MDR kicks in as the tax will be offset through input tax credit, with the issue potentially being discussed at next month's GST Council meeting.
