Illogical move

The Centre’s decision to introduce a 0.4% Merchant Discount Rate (MDR) on specified UPI payments above 2,000 from October 15 deserves sharper scrutiny than the reassuring official language surrounding it. The government says consumers will not be charged and that about 96% of merchant transactions will remain unaffected. Small merchants receiving up to1 lakh a month through UPI QR codes are also exempt. Yet the real question is whether another cost is quietly being added to small businesses already struggling with taxation, compliance and narrow margins. MDR is technically not a tax collected by the government. It is a fee distributed among banks, payment service providers and UPI application providers. For the merchant who pays it, however, the distinction is largely academic. It remains a cost of receiving digital payments. The most baffling aspect is the threshold itself. Why should a 2,000 UPI payment be free while a2,001 payment attracts a 0.4% charge? More importantly, why should a merchant receiving more than 1 lakh a month through UPI suddenly be considered capable of bearing the cost? The criteria do not necessarily reflect profitability, assets, turnover or the actual financial strength of a business. A neighbourhood trader selling furniture, household appliances or garments may routinely receive payments above2,000 without being a large corporate enterprise. A seasonal business may cross the 1 lakh monthly UPI threshold during a festival or peak season without becoming highly profitable. The rule may be administratively convenient, but its economic logic is far less convincing. The Centre argues that MDR is necessary to sustain investment in infrastructure, cybersecurity, fraud prevention and innovation. However, the question remains on whether the cost of maintaining this infrastructure should increasingly be placed on merchants who were encouraged for years to shift from cash to digital payments. The concern becomes sharper when viewed against the broader pattern of economic policymaking. Several tax and regulatory measures have been presented as neutral reforms even though their compliance burden is easier for large corporations to absorb than for small traders. GST compliance, for instance, requires accounting systems and professional assistance that large companies can afford but many small businesses cannot. A rule can therefore be formally equal while producing unequal consequences. The UPI framework risks creating a similar imbalance. Large retailers, organised chains and technology-driven businesses have greater capacity to absorb transaction costs and negotiate commercial arrangements. A small trader has little such bargaining power. What appears to be a small percentage can become significant when margins are already thin.The government has also proposed that 5% of MDR collections go towards supporting UPI adoption among small merchants. But there is an obvious circularity in charging merchants through the payment system and then returning a fraction of the proceeds to encourage the very merchants expected to sustain it. The government must therefore explain the economics of the decision transparently. How much will be collected? Who will receive it? How much will actually be invested in infrastructure and cybersecurity? Why was1 lakh chosen as the exemption threshold, and why `2,000 as the transaction threshold? These are not minor technical questions. India’s digital payment revolution succeeded because UPI was simple, inexpensive and accessible. It should not gradually become another system in which the lower economic sections bear a disproportionate share of the cost. Digital India should not mean that the small trader pays the price for building a system from which the largest players gain the greatest commercial advantage.