UPI Payments Levy: Centre Must Explain on Affidavit, Says SC

The Supreme Court on Monday directed the Union government to explain on affidavit the legal basis for its decision to levy a charge on UPI payments above ₹2,000 made to merchants, a levy that kicks in on 15 October. A bench of Chief Justice of India Surya Kant, Justice Joymalya Bagchi and Justice V Mohana issued notice to the Centre, the Reserve Bank of India (RBI), the National Payments Corporation of India (NPCI) and the UPI & Services Steering Committee on a public interest petition filed by Delhi advocate Anjan Datta, and gave them four weeks to reply. 

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Appearing for the Centre, Additional Solicitor General N Venkataraman told the bench that 96 percent of UPI payments would escape the charge and that essential services had been capped at ₹5. "It is neither a tax nor a fee," he said, adding that the government would not take a single rupee from the collections. He described it as a settlement fee between payment aggregators and banks, arguing that banks bear a real cost for processing electronic transactions, that card payments already carry such charges, and that the levy was needed to keep the ecosystem running. The Chief Justice wanted it in writing. "We need these facts on affidavit. It's more of a technical issue," he said.

Justice Bagchi went to the root of the matter. "Is it tax or a fee? If not a fee, what is the executive basis for making this expropriation? What is the service?" he asked. When the ASG denied it was an expropriation, the judge turned to Section 269SU of the Income Tax Act, which obliges merchants above a turnover threshold to offer electronic payment, and asked who actually receives the money in a UPI transaction and what the source of its legal incidence was. The petitioner's counsel sought a stay, warning that the charge would fuel black money transactions. The bench declined.

Speaking to The Probe after the hearing, Datta said the court had zeroed in on the central weakness of the levy. "The Supreme Court has specifically questioned the statutory source and executive scope of the MDR levy on UPI, which rests on a press release dated 15 September 2026, when the government itself says it is neither a fee, a tax nor a commercial charge," he said. "The court has also asked the Union to respond to the issues raised in the petition, on whether the levy amounts to an executive expropriation or taxable income in the context of Section 269SU of the Income Tax Act. The court has assured us that it will examine the validity of the impugned notification once the Union and the other respondents file their reply affidavits."

The Question The Probe Asked First

Justice Bagchi's question, where does the legal authority for this charge come from, is the one The Probe raised on 17 September. Our report found that the 0.4 percent rate on UPI payments above ₹2,000, which will bind every merchant outside the small-merchant exemption, appears in no gazette notification. It lives in a Press Information Bureau release and an NPCI circular. On Monday, that gap was argued before the country's top court, and the government now has to answer it on affidavit.

Six Years of Zero MDR

A merchant discount rate, or MDR, is the fee a business pays its bank for accepting a digital payment. On cards it bites: RBI allows up to 0.9 percent on debit cards, and credit card fees typically run as high as 2.5 percent. On UPI payments, since the start of 2020, the fee has been zero by law, so the shopkeeper kept every rupee and the bank recovered nothing from the transaction. The design goal was simple: make digital acceptance costless and therefore universal.

The policy arrived in stages. In the July 2019 Union Budget, Finance Minister Nirmala Sitharaman announced that businesses with a turnover above ₹50 crore must offer digital payment options, with no MDR borne by them or passed on to customers. From 1 January 2020, that became law through Section 10A of the Payment and Settlement Systems Act, 2007, which barred banks and payment system providers from charging on UPI and RuPay debit cards. The protection held for almost six years.

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What Changes From 15 October

The new arrangement is a hybrid. Person-to-person transfers stay free at any amount. Payments to merchants up to ₹2,000 stay free. Small merchants receiving up to ₹1 lakh a month through UPI QR codes stay free, and so do recurring payments through UPI AutoPay and mandates. Most other person-to-merchant UPI payments above ₹2,000 now carry a price.

A general person-to-merchant payment above ₹2,000 will attract 0.4 percent, capped at ₹300 for payments of ₹75,000 and above. Railways, telecom, insurance, fuel and farm inputs pay a flat ₹5 per transaction above ₹2,000. Capital market payments attract 0.02 percent, also capped at ₹300. Merchants have been told not to pass the charge on to customers, UPI apps are barred from adding platform fees, and 5 percent of collections is to go into a fund for small merchants.

A Subsidy the Government Chose to End

The government's case is that UPI has grown too expensive to run for free. The figure behind that argument is an industry estimate of about ₹20,700 crore a year, cited in a parliamentary committee report. 

The claim that free UPI payments cannot survive without a charge also runs into the government's own record. For years it paid to keep UPI free through an incentive to banks and payment apps, and it kept raising that support: ₹1,389 crore in 2021-22, ₹2,210 crore the following year and ₹3,631 crore the year after. It then cut the payout to ₹1,046 crore in 2024-25. It could have continued. It chose to wind the subsidy down and shift the cost onto merchants, a policy decision that was never argued openly as one.

The assurance that 96 percent of payments are untouched sidesteps the harder question. Merchants in the remaining slice will pay, and a direction not to pass the cost on is a single sentence with no audit, penalty or refund mechanism behind it. Businesses told to absorb a cost tend to find other ways to recover it.

A Gazette That Names No Rate

At the centre of Datta's challenge is Gazette Notification S.O. 5067(E), dated 14 September. Read closely, it does very little. It protects two payment modes from charges: RuPay debit cards with no ceiling, and UPI transactions up to ₹2,000. It fixes no rate. The figure of 0.4 percent appears nowhere in it.

What the notification effectively does is lift UPI payments above ₹2,000 out of the protection they had enjoyed since 2020, leaving them open to a charge the gazette never names. The actual rates came the next day, 15 September, in a PIB release, and in an NPCI circular issued after deliberations of the UPI & Services Steering Committee, an NPCI-headed body which, the petition argues, holds no rule-making power under the Payment and Settlement Systems Act.

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From Bolt to Dial: The Section 10A Rewrite

Datta's deeper objection is to the machinery that produced the charge. Until this year, Section 10A worked like a bolt. The protected payment modes were those listed under Section 269SU of the income tax law, which covered all UPI payments and RuPay debit card payments, so no minister could remove that shelter at will. Only Parliament could.

The 2026 amendment, folded into the Taxation and Other Laws (Amendment) Act that the Lok Sabha passed on 6 August, replaced the bolt with a dial. The law now lets the Central Government decide by notification which electronic modes stay free of charge. On 8 August, as public unease grew, the Finance Ministry called it a mere enabling provision, promised that consumers and person-to-person payments would stay free, and cited cybersecurity, fraud prevention and infrastructure as the purpose. Five weeks later, the enabling clause had become a detailed four-band levy.

The petition argues that Parliament handed the executive this power with no policy, formula, ceiling or test attached. Lawyers call this excessive delegation. If Section 10A falls, the notification and the entire framework built on it fall with it.

What the Petition Wants

Datta filed the petition under Article 32 on 16 September, arguing that a change hitting merchants, consumers and the digital payments economy at once could not be fought piecemeal across multiple High Courts. He asks the court to quash the notification, compel the government to produce the full record behind the decision, and declare that no MDR can be imposed on the strength of a press release and a set of FAQs.

The petition puts several questions to the court. Did Parliament grant an unguided power that breaches the rights to equality and to carry on trade under Articles 14 and 19(1)(g)? Can a nationwide compulsory charge be switched on without publishing the binding instrument and the reasons behind it? Do the unexplained thresholds of ₹2,000 a payment, ₹1 lakh a month and ₹75,000 for the cap treat similarly situated merchants differently with no disclosed logic? And can a compulsory collection shared among banks and payment firms be anything other than a charge requiring the authority of law? The petition also records that there was no consultation, no draft rates and no hearing for the hundreds of millions affected.

A Nation Nudged Onto UPI

For merchants, the grievance is practical. The state put QR codes on every counter, pushed formalisation, and repeatedly promised that everyday UPI payments would stay free. During the pandemic, when cash felt dangerous, UPI became a lifeline for rich and poor alike, and households and small businesses rebuilt their routines around it. By NPCI's own count, UPI carried 2,451 crore transactions worth about ₹29.82 lakh crore in August 2026 alone, a scale reached precisely because it cost nothing.

The manner of the reversal deepens the grievance. UPI is regulated by the RBI and run by NPCI, a not-for-profit company owned by the same banks that will collect the new charge. The rate was fixed by a committee which, the petition argues, Parliament never empowered, announced through a press office, and published with none of the usual safeguards: no prior notice, no window for objections, no laying before Parliament.

What Happens Next

On Monday the Centre insisted the charge is neither a tax nor a fee and that the government earns nothing from it. The bench wants that explanation on affidavit, along with an answer to Justice Bagchi's question about the legal source of the levy. Unless the court steps in, most UPI payments above ₹2,000 to merchants will carry the new charge from 15 October, and the question The Probe first asked remains open: on what published legal authority does a nationwide levy rest when its rate appears in no gazette?