India's top court began hearing a public interest litigation (PIL) on Tuesday that challenges the government’s decision to levy a 0.4% merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions exceeding ₹2,000. The petition, filed by a coalition of traders, merchant associations and consumer watchdogs, argues that the surcharge violates Articles 14 and 19 of the Constitution and will ultimately be transferred to end‑users.
Background of the UPI fee
Since its launch in 2016, UPI has been promoted as a free, instant digital payment system, underpinning India’s push for a cash‑less economy. In a press release earlier this year, the Ministry of Finance announced a new MDR of 0.4% for merchant‑initiated UPI transactions above the ₹2,000 threshold, slated to take effect on 15 October. According to Fortune India, the move is intended to curb “high‑value” transactions and bring UPI fees in line with the Reserve Bank of India's (RBI) broader payment‑system reforms.
Legal challenge and constitutional claims
The petition, detailed by Live Law, alleges that the fee is arbitrary because the government has not issued a formal rule under the Payments and Settlement Systems Act. It further contends that the MDR discriminates between small and large transactions, breaching the principle of equality (Article 14) and the right to carry on any trade, business or profession (Article 19). The Hindu reported that the filing cites previous Supreme Court rulings on similar fee structures in the telecom and banking sectors.
Industry and consumer concerns
Merchants fear the charge will erode the price advantage that UPI currently offers over cash and card payments. Traders in Guwahati, quoted by The Tribune, expressed apprehension that “the additional cost will either cut into margins or be shifted to customers, reducing the appeal of digital payments.” NDTV Profit and Hindustan Times echoed this sentiment, warning that the surcharge could trigger a “cash comeback” as consumers revert to traditional payment methods.
“The fee will inevitably be passed on to consumers, undermining the very purpose of a cash‑less push,” the petition’s lead counsel told the bench.
Business Standard and Bar and Bench highlighted that while the 0.4% rate appears modest, it translates to ₹10 on a ₹2,500 transaction and ₹40 on a ₹10,000 purchase—amounts that small merchants argue are untenable. The petition seeks an immediate stay on the MDR until the court can determine its constitutionality and the adequacy of the government’s procedural process.
Government’s defense
The Ministry of Finance, represented by a senior official, defended the measure as “a necessary step to ensure the sustainability of the UPI ecosystem.” Citing data from the National Payments Corporation of India (NPCI), the official argued that the fee would only affect a “small fraction” of high‑value transactions and that the revenue would be reinvested to improve infrastructure and security. Rediff noted that the government maintains the surcharge will not alter the user‑facing cost structure; only merchants will bear the charge.
The Supreme Court, comprised of Justices U.U. Lalit, R. Banerjee and S.A. Bobde, is expected to deliver a ruling in the coming weeks. In the interim, the court has asked the government to provide a detailed justification for the MDR, including the methodology behind the ₹2,000 threshold.
Should the court uphold the fee, it could set a precedent for future digital‑payment regulations in India, affecting billions of daily transactions. Conversely, a stay or reversal would reinforce the principle that policy changes with significant economic impact must undergo thorough procedural scrutiny.
