Background
What is Merchant Discount Rate (MDR)?
MDR is the fee associated with processing a digital payment. It is generally paid by the merchant to the banks/payment networks involved in facilitating the transaction.
What is the Zero-MDR regime?
Since 2020, India has prohibited the imposition of MDR on:
UPI transactions
RuPay debit-card transactions
Thus, consumers generally make UPI payments without paying a transaction fee, while merchants also do not bear MDR for covered transactions.
Why was Zero MDR introduced?
The policy was aimed at:
Promoting digital payments
Increasing financial inclusion
Making UPI affordable for small merchants
Accelerating India's transition towards a less-cash economy
Strengthening India's indigenous digital-payment infrastructure
The policy played an important role in the rapid adoption of UPI.
India–US Trade Dimension
The issue has acquired significance because of concerns raised by the United States Trade Representative (USTR).
Section 301 investigation
The US uses Section 301 of the Trade Act as a mechanism to investigate and potentially respond to foreign practices considered discriminatory or harmful to US commerce.
In March 2026, USTR reportedly characterised aspects of India's digital-payment policy as favouring domestic players.
Why are Visa and Mastercard concerned?
The rapid expansion of UPI has reduced the space traditionally occupied by card networks.
India's zero-MDR model means that merchants can use UPI without paying the transaction charges associated with conventional card networks.
This has potentially affected the business opportunities of international payment networks such as Visa and Mastercard.
Third-party app concentration
The US has also raised concerns about the structure of India's UPI ecosystem, including the 30% market-share cap applicable to third-party application providers (TPAPs).
At the same time, two US-owned providers account for a very large share of UPI transactions, making the competitive-policy debate more complex.
Earlier precedent
India's earlier decision to withdraw the 6% equalisation levy on digital services has also been viewed in the context of broader India–US trade negotiations.
Features
Legal backing to modify Zero MDR
The amendment removes the existing statutory linkage between the Payment and Settlement Systems Act, 2007 and the Income Tax Act, thereby giving the government greater flexibility to alter the zero-charge framework.
Important: The Bill does not itself impose MDR on UPI.
The actual decision regarding any future charge would involve the NPCI-led steering mechanism.
Charges, if introduced, would target merchants.
Any MDR introduced under the framework would be a charge on the merchant/payment ecosystem, rather than a direct fee imposed on consumers.
Electronics manufacturing
The Bill also contains measures intended to encourage domestic electronics manufacturing.
Foreign Portfolio Investors
It also replaces an earlier June 2026 ordinance relating to exemptions for interest income and capital gains earned by Foreign Portfolio Investors from government securities.
Significance
Protects consumer-facing free UPI
The Bill does not immediately make UPI transactions chargeable to consumers.
Provides policy flexibility
The government gains greater legal flexibility to modify the MDR framework as the digital-payment ecosystem evolves.
Balances domestic and foreign payment networks
The reform could potentially create a more commercially sustainable payment ecosystem while addressing concerns of international payment networks.
Trade-negotiation significance
The issue illustrates how digital infrastructure and payment systems have become part of contemporary trade negotiations.
Challenges
Risk to UPI adoption
If MDR is eventually imposed and merchants pass the additional cost into prices, it could reduce the attractiveness of UPI, particularly for small businesses.
Impact on small merchants
Small retailers often operate on thin margins. Even a relatively small transaction cost could become significant when accumulated over large transaction volumes.
Threat to the zero-cost model
UPI's success has partly been built around the principle of low-cost and frictionless digital payments. Introducing charges could alter this model.
Policy autonomy
A major concern is whether changes to India's digital-payment framework represent an independent domestic policy choice or a concession made under external trade pressure.
Sustainability of the payment ecosystem
The zero-MDR model raises the question of who ultimately bears the cost of maintaining India's massive digital-payment infrastructure.
Way Forward
Preserve affordable UPI
Any MDR framework should ensure that ordinary consumers continue to enjoy affordable digital payments.
Protect small merchants
If MDR is introduced, the government could consider thresholds or differentiated rates for small merchants.
Targeted rather than blanket charges
Instead of abandoning zero MDR altogether, India could explore selective and transaction-specific pricing models.
Ensure competitive neutrality
Regulation should provide a level playing field for Indian and foreign payment networks without compromising India's strategic interests.
Develop sustainable financing
The government and payment ecosystem should explore alternative mechanisms to finance UPI infrastructure and incentives without undermining adoption.
Separate trade negotiations from domestic digital policy
India should ensure that changes to payment policy are based on long-term economic and technological considerations, while addressing legitimate trade concerns through transparent negotiations.
Conclusion
The Taxation and Other Laws (Amendment) Bill, 2026 does not impose MDR on UPI directly. Instead, it leaves room for the revision of the current free-of-charge system. The key policy problem in this case is to strike a balance between the accessibility and popularisation of UPI and the sustainability of the Indian digital payment system in terms of its business model. The best way to proceed for India in this situation would be to retain the low-cost level of UPI, safeguard small vendors and consumers, and at the same time create a sustainable payment financing business model.
