Supreme Court Refuses to Stay 0.4% UPI Charge, Asks the Centre What Its Legal Character Is

The news

New Delhi. The Supreme Court on Monday, September 28, refused to stay the Centre’s decision to levy a merchant discount rate (MDR) of 0.4% on person-to-merchant (P2M) UPI payments above ₹2,000 from October 15, 2026, but asked the government to explain the legal basis of the charge. The court challenge is new since our 19 September card on the charge’s design. The MDR is the fee a merchant pays, as a share of each payment, to the banks, payment aggregators and network that move the money; a P2M payment goes to a shop or business, unlike a transfer between two individuals. A three-judge Bench of Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V. Mohana issued notice to the Union, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) on a public interest petition by advocate Anjan Datta against the Finance Ministry’s September 14, 2026 gazette notification, and gave four weeks for counter affidavits, The Hindu reports. The papers report Justice Bagchi’s question in slightly different words; The Economic Times has: “Is it tax or a fee? If not a fee, what is the executive basis for making this expropriation? What is the service?” Additional Solicitor General N. Venkataraman replied, “It is neither a tax nor a fee,” and “it is not an expropriation.” He said 96% of people using the gateway are exempted; among the remaining 4%, essential services are capped at ₹5, and any payment above ₹75,000 is capped at ₹300, “whether it’s Rs 1 crore or 10 crore or 100 crore” (The Indian Express). The charge is a settlement fee between payment aggregators and banks, card payments already carry charges, and the government is not taking “a single rupee”, he said; “It’s not a statutory collection… The NPCI, the nodal body, facilitates.” Person-to-person UPI stays free. The court called it “less of a legal and more of a technical issue”, said it was examining only the “legal incidence”, and cited Section 269SU of the Income Tax Act, 1961, which requires merchants above a threshold turnover to offer electronic payment modes. If that section permits such transfers, it asked, “what is the character of the receipt”, and in whose hands does it amount to “income”? The petition also challenges the amended Section 10A of the Payment and Settlement Systems Act, 2007, for giving the Executive unguided power to decide which modes get no-charge protection, noting that RuPay debit cards keep it without a monetary ceiling. The petitioner argued businesses may pass the cost to consumers and that cash and black money would return; the Bench declined a stay. Syllabus: GS3 digital payments and resource mobilisation; GS2 limits of executive power.

Static syllabus linkage

1. The MDR is a price for a payment service, paid by the merchant, not the customer. When a customer pays a shop digitally, the money passes through the customer’s bank, the merchant’s bank (the acquirer), often a payment aggregator or app, and the network that routes the message. The merchant discount rate is the percentage of the payment that the merchant gives up to pay these parties. On cards it has long been charged; on UPI and RuPay debit cards it was set at zero by law for prescribed businesses. An MDR is therefore not a government levy in the ordinary sense, which is exactly why the court is asking what legal character it has once a government notification switches it on.
2. The Payment and Settlement Systems Act makes the RBI the regulator and NPCI an authorised operator. The Payment and Settlement Systems Act, 2007 designates the Reserve Bank of India as the authority to regulate and supervise payment systems, and no one may run a payment system without the RBI’s authorisation under the Act. The National Payments Corporation of India is a not-for-profit company promoted by the RBI and the Indian Banks’ Association; it operates UPI, RuPay, IMPS and other retail systems as an authorised operator, and is not itself a regulator. Section 10A, inserted in 2019, bars banks and system providers from imposing any charge for the electronic modes prescribed under Section 269SU of the Income-tax Act, 1961 (carried into Section 187 of the Income-tax Act, 2025 from April 2026). The provision requires businesses above a turnover threshold to provide those prescribed modes to customers.
3. Article 265 forbids any tax without authority of law, and a fee must carry a quid pro quo. Article 265 says no tax shall be levied or collected except by authority of law, which means a statute passed by a legislature, not an executive order alone. In Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt (1954), the Supreme Court distinguished a tax, a compulsory exaction for general public purposes with no promise of a specific return, from a fee, which is charged for a special service rendered to the payer and carries an element of quid pro quo. Article 110(2) reflects the same distinction: a Bill is not a Money Bill merely because it provides for fees for licences or services rendered. This is why the court asked “What is the service?”; if the charge is neither tax nor fee, the government must show it is a private contractual price that a statute allows.
4. Delegated power is valid only if the parent law lays down a policy, and its use must not be arbitrary. Parliament may delegate rule-making to the Executive, but it cannot hand over its essential legislative function; the parent Act must lay down the policy and guidelines within which the delegate acts, a principle traced to In re Delhi Laws Act (1951). A delegation without guidance is struck down as excessive delegation. Separately, since E.P. Royappa v. State of Tamil Nadu (1974), arbitrariness is treated as the antithesis of equality under Article 14, so even valid delegated power must be exercised on reasoned, non-discriminatory grounds. The petition’s attack on Section 10A, and its complaint that RuPay debit cards keep zero-charge protection while large UPI payments lose it, rests on these two doctrines.

Why UPSC loves this

1. GS3 asks how India’s digital public infrastructure will be paid for. The syllabus lists inclusive growth, mobilisation of resources and the effects of policy on the common citizen. Mains questions on digital payments have moved from celebrating adoption to asking about sustainability, cyber-fraud and the economics of zero-cost rails. The MDR case lets an answer show both the economic question of who funds UPI and the legal question of how a charge may be imposed.
2. Prelims tests institutions and the constitutional vocabulary of levies. Digital-payments questions have typically asked who operates UPI and RuPay, and who regulates payment systems. The tax–fee–cess distinction, Article 265 and the Money Bill definition under Article 110 are standard Polity material. This case ties both sets together, which is the kind of overlap examiners like.
3. GS2 on separation of powers and delegated legislation. Whether the Executive can decide by notification which payment modes get statutory protection is a clean example of the excessive-delegation question, useful in answers on parliamentary control of delegated legislation and judicial review of economic policy.

Analysis

1. The Centre’s best legal answer is also its most awkward one. By calling the MDR “neither a tax nor a fee”, the ASG places it outside Article 265: if it is a private price between merchants, aggregators and banks, no taxing statute is needed. But a purely private price would not normally need a gazette notification. What the notification really does is lift, for payments above ₹2,000, a statutory ban on charging that Section 10A imposed. The honest legal question is therefore not whether the government is taxing, but whether the Executive may selectively withdraw a protection Parliament created. That is why the challenge to Section 10A is the stronger half of the petition.
2. The RuPay asymmetry is where Article 14 bites. The petitioner points out that RuPay debit cards keep no-charge protection without any monetary ceiling, while UPI payments above ₹2,000 lose it. Two digital modes serving the same merchant are thus treated differently, and the state must give a reason. A plausible reason exists: RuPay is a domestic card network the state wishes to promote, and card and UPI economics differ. The weakness is that the parent section gives no stated criteria for such choices, and courts now expect delegated power to come with reasons on record. The Centre’s affidavit will succeed or fail on whether it can articulate that policy.
3. “96% exempt” is a count of people, not of money. The ASG said 96% of users are exempted. That is true by number, but the charge was designed to fall where the value is, on large payments to merchants. A merchant receiving a few big payments a day bears most of the cost, and the 19 September reports showed merchants already splitting bills into ₹2,000 pieces. The figure is persuasive in court but tells us little about the burden on traders, which is the petition’s real grievance. A fairer statistic for the affidavit would be the share of P2M value, not users, that attracts the charge.
4. Someone has always paid for UPI; the question is who. Zero MDR never meant zero cost. Banks and apps absorbed the cost of running the rails, and the Centre has in recent years paid banks incentives for low-value UPI and RuPay transactions from the Budget. The choice is between the taxpayer, the banks and the merchant. Charging only large merchant payments is defensible, because those users benefit most and can bear a fee. The counter-view is that a free, universal payment rail is a public good like a road, and that small frictions can push informal businesses back to cash, reversing gains in formalisation and tax visibility.
5. The court’s “income” question has consequences beyond this case. By asking in whose hands the charge amounts to income, the Bench is testing whether the government can distance itself from a receipt that exists only because of its notification. If the charge is income of banks and aggregators, the Centre’s position holds. If the court sees it as a compulsory exaction enabled by the state, Article 265 comes back into play. The answer will shape how India funds other digital public infrastructure, from account aggregators to open commerce networks.

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