GS-III: Economy | Digital Payments | Banking & Finance | Digital Public Infrastructure | Financial Inclusion
Context
- Government considering charges on UPI transactions: The government’s decision to allow banks and payment processors to levy a charge on UPI transactions is still pending, but preparations for such a move are apparent.
- Legal framework has been amended: The Payment and Settlements Systems Act has been amended to allow the government to notify which types of transactions can attract a charge.
- Taxation and Other Laws (Amendment) Bill, 2026: The amendment was made through the Bill, which was passed in the Lok Sabha without a debate.
Current framework for UPI charges
- UPI and RuPay were earlier exempt: Before the amendment, UPI and RuPay debit card transactions were expressly exempt from any charges.
- Possible restriction to large merchants: Government sources indicate that charges could initially apply only to transactions conducted by large merchants with turnovers above ₹1 crore–₹1.5 crore.
- Threshold for transactions: Charges could apply to transactions above ₹2,000 in value.
- Limited coverage: Such a framework would restrict the charge to around 5% of all UPI transactions.
- Scope can be widened: The amended law gives the government the ability to widen the scope of transactions on which charges can be imposed.
Concerns over UPI charges
- Risk of cost being passed to consumers: Merchants may pass the additional cost on to consumers.
- Possibility of return to cash: Consumers may shift back to cash, which remains free to use.
- Potential impact on digital payments: Such a shift could affect the use of UPI as a digital payment mechanism.
Cost of maintaining the UPI ecosystem
- UPI has been free since 2020: Payment players have argued that they have been bearing the cost of maintaining and running UPI since it was made free.
- RBI’s position on cost recovery: RBI Governor Sanjay Malhotra has said that “somebody has to pay” for UPI.
- Payment processors and banks currently bear the burden: The argument is that the payment processors or banks should no longer be the ones solely bearing these costs.
Government subsidy for UPI
- Taxpayers already bear part of the cost: The burden of maintaining UPI has not been borne solely by payment processors and banks.
- Subsidy introduced in 2021: The government introduced a scheme to partially cover the cost incurred by payment processors and banks for processing transactions up to ₹2,000 by small merchants.
- Significant government expenditure: The government has already paid around ₹11,349 crore under the scheme.
- Further allocation: Another ₹2,000 crore has been budgeted for 2026–27.
- Question over additional charges: This raises the question of whether consumers and merchants should pay an additional charge when part of the cost is already being met through their taxes.
Debate over the government’s approach
- Perception after demonetisation: There is anger over the perception that the government pushed people towards UPI through demonetisation, only to now allow it to become chargeable.
- Argument in favour of charges: Finance Minister Nirmala Sitharaman has argued that charges would help payment players invest more in infrastructure, innovation and security.
- RBI as an alternative source: The RBI has the resources to pay for UPI’s development.
- Impact on RBI surplus: Using RBI resources would entail a small reduction in the surplus transferred by the RBI to the Centre.
- Avoiding an unpopular decision: This option could save the government from taking an increasingly unpopular decision.
Key Policy Question
- Sustainability versus affordability: The central question is whether the cost of maintaining UPI should be borne by payment processors and banks, taxpayers, or consumers and merchants through additional charges.
Conclusion
The debate over UPI charges raises important questions about who should bear the cost of maintaining India’s digital payment ecosystem. While charges could provide payment players with greater resources for infrastructure, innovation and security, the government must also consider the possibility of cost pass-through to consumers and a shift back to cash, especially when taxpayers are already contributing towards the UPI ecosystem.
UPSC Mains Practice Question
Q. The proposed levy of charges on UPI transactions raises concerns regarding the sustainability and affordability of India’s digital payment ecosystem. Discuss the issues involved.
