A committee of Parliament has recommended imposing Merchant Discount Rate (MDR) on high value transactions to make the country’s digital payments system self-reliant.
In a significant step toward making the country’s digital payments ecosystem financially self-reliant and robust, a parliamentary committee has taken a strong stance.
The Standing Committee on Finance has clarified in its report that the early implementation of the Merchant Discount Rate (MDR) on high-value digital transactions is essential for the long-term sustainability of the payments ecosystem without government support.
Recommendation to impose MDR on high-value digital transactions
MDR is a fee paid by a merchant or trader to a bank or payment processor when accepting digital payments.
This fee typically ranges from one to three percent of the total transaction amount, and is borne by the merchant, not the customer. However, the committee believes that the current zero-MDR policy is increasing the financial burden on the government.
According to the report, the budgetary allocation of Rs 2,000 crore to compensate for the loss of RuPay debit cards and low-value BHIM-UPI transactions unnecessarily increases the ministry’s demand for grants, while this amount covers only 10 per cent of the industry’s actual operating costs of Rs 20,700 crore.
The committee expressed concern that if this funding gap is not addressed soon, essential investments in critical areas such as cybersecurity, fraud prevention, and network infrastructure could be jeopardized.
Small merchants and P2P transfers will be protected.
The committee highlighted that payment service providers are constantly struggling due to inadequate subsidies. Chaired by senior BJP leader Bhartruhari Mahtab, the committee emphasized that a transparent and tiered revenue model should be adopted only for large transactions, while ensuring the complete protection of small merchants and P2P (person-to-person) transfers.
It is noteworthy that in a major step in this direction, Parliament recently approved a bill amending the Payment and Settlement Systems Act, 2007 and the Income Tax Act. Following this amendment, the government and authorized banks have now moved forward legally to levy fees on payments made through UPI and other electronic means.
The main objective of this change is to make the country’s digital payment network financially independent, so that banks and fintech companies can get long-term stability without putting additional pressure on common citizens and small businesses.
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