Someone has to pay for UPI. How do we decide who?

The recent Taxation and Other Laws (Amendment) Bill, 2026 aims to dismantle the free-UPI regime in India. However, a key clause within the bill repeals a rule that has been in place since January 2020, prohibiting the levying of a merchant discount rate (MDR) on UPI payments. The MDR is a fee paid by merchants to their banks for accepting digital payments, typically ranging from one to two percent on card transactions. On UPI, this fee has been zero, mandated by statute.

The bill does not impose any charge, instead empowering the government to decide, through notification, which payment modes remain free of charge. It does not specify any rate, threshold, or exemptions for small merchants or ordinary users. The government assures that only large merchants will be charged, but these assurances are not guaranteed by law.

The bill has only cleared the Lok Sabha and is not yet law. Until it becomes law, UPI may still be charged, with terms yet to be decided. The change was driven by the need to relieve the exchequer and permit a fee in its place.

The primary concern is incidence. If large merchants are charged, they may pass the cost onto their customers. The extent to which this cost is passed on depends on factors such as the elasticity and curvature of demand, which can range from half to more than the full cost. A modest fee on large, high-value transactions is more tolerable than a fee on neighbourhood stores.

Another concern is the impact on the money supply and demand. A charge does not remove UPI from the money supply; it merely moves bank deposits, which are already considered money. The fee alters the ease with which this money is used, potentially shifting demand towards cash, which is marginally less expensive to transact with. However, evidence suggests that cash has not receded despite the expansion of UPI.

A third concern is timing. The bill coincides with trade negotiations with the United States, raising suspicions about its motives. While the bill does not surrender UPI's zero MDR, enacting it during these negotiations could be viewed as a surrend...