The introduction of merchant discount rate (MDR) on select transactions on the Unified Payments Interface (UPI) has triggered a widespread debate on whether consumers could ultimately bear the cost of a charge that the government says is payable by merchants.

Former BharatPe co-founder Ashneer Grover has criticised the introduction of MDR, describing any levy on UPI as ‘just tax collection’.

In a September 15 post on X, Grover questioned why UPI needs to be monetised, citing the Reserve Bank of India’s surplus transfer to the government, listed-bank profits and NPCI’s pre-tax surplus. “So, who is facing any loss from UPI and which subsidy is the government paying on UPI?” he asked.

Grover also compared the economics of UPI with the cost of maintaining India’s cash infrastructure. He cited an annual cost of around ₹30,500 crore for ATMs and cash logistics and suggested that, if cost reduction is the objective, India should shut ATMs and promote UPI instead.

“UPI is the one scientific achievement of India everyone acknowledges, but now it will be sacrificed at the altar of tax,” Grover said in another post.

Leader of Opposition in the Lok Sabha Rahul Gandhi has also described the measure as a ‘UPI tax’. Gandhi argued on X that transactions above ₹2,000 may account for a relatively small share of transaction volume but a much larger share of UPI’s total transaction value.

“The government says no fees will be charged to customers. But where will the fees imposed on shopkeepers ultimately come from?” he wrote. “Added to the prices, straight out of the customer’s pocket.”

In a subsequent video posted on X on September 16, Gandhi urged Prime Minister Narendra Modi to roll back the UPI tax.

Retailers fear a shift back to cash

The Retailers Association of India (RAI) has raised a similar concern from the merchant side, arguing that the cost could alter how small retailers accept payments.

“For MSME retailers already running on thin margins, that burden creates a straightforward incentive to steer transactions back toward cash,” RAI said, as reported by the Press Trust of India. Its CEO Kumar Rajagopalan said, “Small merchants will now think twice about whether to accept cash or UPI.”

Rajagopalan also pointed to the festive season, when a large share of purchases cross ₹2,000, saying that “the moment a fee attaches itself to digital payment, cash becomes the path of least resistance.”

“This cuts against the government’s own formalisation agenda,” Rajagopalan said. “UPI acceptance should be incentivised, not taxed.”

The association argued that transactions moving from UPI to cash would disappear from the formal trail that feeds GST reporting.

RAI has also questioned why normal bank-to-bank UPI payments should attract a charge comparable to credit-linked transactions. “We don’t see the case for charging a bank-to-bank UPI payment the way you’d charge for credit,” Rajagopalan said. The association said that the government should bear the cost of normal UPI transactions because of the GST revenue and traceable transaction trail they generate.

Pressure on consumer-facing businesses

The Clothing Manufacturers Association of India (CMAI) has raised concerns about the timing of the change, which takes effect just before the festive season.

“Introducing MDR on UPI at the start of the festive season could not have come at a more challenging time for the industry,” said CMAI President Santosh Katariya. “This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins.”

“Adding another cost to digital transactions at this juncture risks putting further pressure on an ecosystem that is still finding its footing,” Katariya added. He said UPI had been “a powerful enabler of consumption and formalisation” and that any move increasing the cost of acceptance needed to be “carefully calibrated”.

The All India Consumer Products Distributors Federation (AICPDF) has similarly argued that the existing zero-MDR threshold for small retailers should be “substantially enhanced”, saying it does not adequately reflect the growth in business volumes among small and petty retailers. The federation has also sought “complete clarity” on whether MDR would apply to bill payments, electricity payments, taxes, BBPS and other essential transactions.

AICPDF said it supports digital payments but called for a wider zero-MDR mechanism to protect small retailers and MSMEs.

For consumers, the dispute therefore centres on what happens beyond the formal rule that MDR cannot be passed on to them. Whether merchants continue accepting UPI on the same terms, absorb the cost, or reconsider the payment method for higher-value transactions remains a trending discussion on social media platforms.