A TEMPORARY relief has come this festive season for UPI (Unified Payments Interface) users as the Government has deferred the Merchant Discount Rate (MDR) fee of 0.4 per cent on transactions over Rs 2,000 till the festivals are over. The National Payments Corporation of India (NPCI) had announced last month about the MDR fee to be levied on person-to-merchant UPI payments above Rs 2,000 from October 15. It has not set a new date for fee implementation but might take a call after Diwali thus keeping UPI users in a quandary over the exact nature of “taxes” they need to pay on transactions over Rs 2,000.

 

The Government will avoid spreading the fear of UPI charges in the festive season which has already clocked massive online sales. But whenever it is introduced it will weaken the system and create difficulties for businesses. UPI has been the most preferred mode in the country for six years as it is free of taxes. Figures of this financial year shows that 55.5 crore Indians made UPI transactions worth Rs 314 lakh crore. The first two days of the festive season saw online purchases of Rs 24,000 crore in the country. This number underscores the ease of UPI as the easiest and safest way of making digital payments. Yet, the Government has decided to end the free ride, making people fret over the MDR’s cascading effect on their own budgets.

 

Though the Government made it clear that the MDR fee over Rs 2000 person-to-merchant transactions will not be passed on to the consumers, there is already panic among UPI users. There is growing aversion among people in tier-2 cities and small towns for UPI payments. After readily embracing UPI as a hassle-free and preferred mode for financial transactions of even Rs 20, towns and villages are registering a drop in UPI transactions. Lack of awareness is responsible for this situation but there is also a growing grudge among the common masses for complicating a highly successful tool of financial liberation. Traders across the country have joined hands against the 0.4 per cent levy as they will be hit the hardest by the decision. The Government has tried to allay all fears by spelling out the modalities of UPI payments but the question remains -- Why impose the fee? The Government says it is needed to run UPI safely and expand the system.

 

It proposes to use the revenue generated through MDR for infrastructure resilience, innovation and cybersecurity to ensure long-term financial health and safety of the Unified Payments Network. However, instead of making the users pay, it can ask banks and payment apps to share the cost. Banks operate at a massive scale. They save money when customers opt for UPI instead of cash. It saves the banks’ cash handling and transporting charges. These institutions can share the relatively low running UPI transaction costs. Similarly, payment apps have access to customers’ data which they use to sell financial products. Given the huge customer base in India, they can serve a massive clientele and in return share the cost. Despite Government assurance that businesses or merchants would not be allowed to pass on the taxes to consumers, there are many ways where the system can be tweaked.

 

The fear among consumers that the UPI transaction charges would be smartly included in the MRP of the product to offset the 0.4 per cent burden is a valid concern. Shopkeepers may recover fees on larger bills by raising prices across products. A customer buying a Rs 10 item in cash could therefore pay more. Given the vast business network and increasing person-to-merchant transactions of over Rs 2,000, the additional financial burden is bound to be passed on to the customers. The argument that payments below Rs 2,000 would not be charged also does not inspire confidence as UPI fees could affect everyone. The Government will do well to find an alternative to fund the UPI while keeping it free for users. As it is, the cost needed to keep the UPI system running is not clear. An independent audit is therefore advised to review the estimate before disturbing a highly successful idea.