Retail, apparel bodies slam UPI fee ahead of festive season; fuel dealers seek exemption

A day after the government announced a 0.4 per cent fee on UPI merchant transactions above Rs 2,000, trade bodies across retail, apparel and fuel warned the move could derail digital adoption just as the festive season begins.

On Tuesday (September 15), ending nearly six years of fully free UPI payments, the government introduced a 0.4 per cent fee on transfers worth more than Rs 2,000 made to merchants through the platform from October 15, while explicitly ring-fencing everyday person-to-person transactions as well as small payments from any charge.

Why merchants are worried

But it has triggered concern that merchants operating on thin margins may revert to cash, undermining the government’s own push for formalisation. Trade bodies argue that the policy undermines the government’s own digitisation agenda.

Together, the three associations highlight the risk that a uniform MDR could reverse hard-won gains in digital adoption across sectors.

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For retailers, the concern is that small merchants may revert to cash, weakening GST reporting and formalisation. For apparel manufacturers, the worry is that festive sales could be dampened by added costs. For fuel dealers, the fear is that fixed margins leave no room to absorb transaction fees, potentially discouraging UPI use at pumps.

What retailers say

The Retailers Association of India (RAI) was among the first to sound the alarm. On Wednesday (September 15), it said the Merchant Discount Rate (MDR) “creates a straightforward incentive to steer transactions back towards cash.”

CEO Kumar Rajagopalan warned: “This burden could undo years of progress in digital payment adoption. Small merchants will now think twice about whether to accept cash or UPI.” He added, “This cuts against the government’s own formalisation agenda. UPI acceptance should be incentivised, not taxed.”

RAI argued that most UPI payments are debit-linked, drawing directly from savings or current accounts, and therefore lack the interchange costs or credit risk that justify charges on card networks.

RAI to write to finance ministry

“NPCI keeps UPI running for the entire country; RBI or the government should be underwriting that cost, not merchants,” Rajagopalan said. “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.”

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The association, which represents large-format stores, specialty retail, e-commerce and quick commerce players, said it would petition the National Payments Corporation of India (NPCI) and the finance ministry for a graded MDR structure. It wants debit-linked UPI transactions treated differently from credit-linked ones, alongside incentives to keep small retailers within the formal payment system.

Apparel merchants worry over timing

The Clothing Manufacturers Association of India (CMAI) echoed the concern, stressing the timing of the move.

“Introducing MDR on UPI at the start of the festive season could not have come at a more challenging time for the industry,” said president Santosh Katariya. “This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins.”

He added, “UPI has been a powerful enabler of consumption and formalisation, and any move that increases the cost of acceptance needs to be carefully calibrated, particularly during the most important sales period of the year.”

Fuel traders seek exemption

The All India Petroleum Dealers Association went further, demanding complete exemption for fuel outlets. President Ajay Bansal wrote to the Finance Minister, “Dealer margins are determined by the Oil Marketing Companies under the guidance of the Ministry of Petroleum and Natural Gas and are primarily fixed on a per-litre basis, rather than as a percentage of the transaction value. Dealers, therefore, have no mechanism to increase their earnings in proportion to the value of a transaction.”

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Bansal warned that even a modest fixed charge would have a disproportionate impact. “Even a seemingly modest fixed charge of Rs 5 per UPI transaction above Rs 2,000 would have a substantial cumulative impact. Petrol pumps process a very large number of transactions every day, and the multiplication of even a small charge across thousands of transactions would create a significant recurring financial burden. A percentage-based MDR of up to 0.4 per cent would be even more disproportionate to the economics of petroleum retailing,” he wrote.

Commissions not revised in nearly a decade

The association noted that dealer commissions have not been revised since October 2017, even as operational expenses such as electricity, wages and regulatory compliance have steadily risen.

“Such charges could also create an undesirable situation in which dealers are compelled to discourage or restrict UPI payments above a particular threshold merely to protect their already thin margins. This would be contrary to the Government’s broader objective of promoting digital payments, transparency and ease of transactions,” the letter warned.

Petroleum dealers argued that precedents exist where the government acknowledged the distinct nature of fuel transactions and exempted card payments, a principle they say must extend to UPI.

“Digital payments have significantly enhanced customer convenience, transaction transparency and operational efficiency in fuel retailing. Petroleum dealers should therefore not be financially penalised for facilitating and encouraging such digital transactions,” Bansal wrote.

(With agency inputs)