No stay doesn’t mean SC has backed UPI MDR: What Monday’s order means

The Supreme Court’s refusal to stay the proposed Merchant Discount Rate (MDR) on specified UPI person-to-merchant transactions above ₹2,000 is not an endorsement of the new charge.

The court has, at this stage, only declined to halt the proposed October 15 rollout while seeking further material from the Centre, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) on the legal and policy basis of the framework. The case is expected to come up again on October 13, two days before the proposed implementation date.

Does no stay mean SC approval?

The distinction could become important as the litigation progresses. The Centre has maintained that MDR is not a tax or government levy, but a service charge operating within the payments ecosystem. The government has also told the court that the MDR collected from merchants will not accrue to the government.

Also read | GST on UPI MDR won’t affect small merchants, insists NPCI

Tax and consulting professional Amit Maheshwari, Managing Partner at AKM Global, said the court's order should therefore not be interpreted as a judicial approval of the levy.

“The Supreme Court's refusal to stay the proposed MDR does not mean that the court has upheld the levy. The court has only declined to halt the rollout at this stage, while asking the Centre to explain the basis for the framework.”

According to Maheshwari, the questions now before the court go to the foundation of the framework — what exactly the charge is, who imposes it and on what legal footing it operates. “The Centre's position is that MDR is not a tax or a government levy but a charge within the payments ecosystem,” he said.

What is changing for UPI payments?

Under the new framework, a 0.4% MDR will apply to specified person-to-merchant UPI transactions above ₹2,000 from October 15. The MDR will be capped at ₹300 for transactions of ₹75,000 and above. Certain sectors, including railways, telecom, insurance and fuel, will have a separate concessional MDR of ₹5 for qualifying transactions.

The charge is designed to be borne by the merchant rather than the consumer. Person-to-person UPI payments will remain outside the framework, while small merchants receiving up to ₹1 lakh a month through UPI QR payments are also set to remain exempt.

The government has said the vast majority of UPI merchant transactions will remain unaffected. The introduction of MDR nevertheless marks a significant change for India's digital-payments ecosystem, which has operated with zero MDR on UPI merchant transactions for several years.

For merchants, the immediate question is the additional cost of accepting qualifying UPI payments. While the charge is not to be directly recovered from customers, industry discussions have raised questions over whether payment costs could eventually influence merchant pricing or payment preferences.

GST question adds another layer

The proposed MDR has also triggered questions around GST.

Maheshwari said that if the framework takes effect on October 15, GST, where applicable, would attach to the underlying payment or settlement service, rather than to the UPI transaction or the money being transferred itself.

“The treatment will depend on who supplies the service, who receives it, the nature of the service, and any applicable exemption,” he said.

Tax experts have said the MDR charged on eligible UPI transactions could attract 18% GST, with registered merchants generally able to claim input tax credit subject to the applicable GST rules. Government officials and NPCI have also clarified that GST applies to the MDR/service charge rather than the entire value of the UPI transaction.

For example, on a ₹10,000 eligible transaction, the 0.4% MDR would amount to ₹40. If GST is applicable on that service charge, the tax would be calculated on the ₹40 MDR rather than on the ₹10,000 payment itself.

Also read | UPI MDR unlikely to push up cash transactions: Finance Ministry

NPCI has said GST paid on the MDR can be adjusted through input tax credit for eligible merchants, meaning the tax treatment may not translate into an equivalent permanent cost for businesses that can claim the credit.

The larger issue before the court

Maheshwari said the central question is now not merely the quantum of MDR but how the charge fits within the existing legal, GST and payment-services framework.

“That will matter as much to merchants, banks and payment providers as the outcome in court,” he said.

The Supreme Court's October 13 hearing could therefore be significant for the future of the framework. Until then, the Centre will have to explain the legal foundation of the charge, while the RBI and NPCI will respond to the challenges raised against the new regime.

For consumers, there is no immediate direct UPI fee under the framework. For merchants, banks and payment platforms, however, October 15 could mark the beginning of a new cost and revenue structure for higher-value UPI transactions — subject to the outcome of the pending legal challenge.