Former RBI Governor C. Rangarajan has called on the GST Council to waive taxes on UPI transaction fees for payments over ₹2,000. As merchants prepare for a 0.4% fee implementation on October 15, 2026, concerns remain regarding increased costs for small businesses and potential friction in digital adoption.
Former Reserve Bank of India Governor C. Rangarajan has urged the GST Council to exempt the proposed Merchant Discount Rate (MDR) on UPI transactions exceeding ₹2,000 from Goods and Services Tax. His recommendation comes just ahead of the scheduled implementation of a 0.4% MDR on certain merchant UPI payments, which is set to begin on October 15, 2026. Rangarajan argued that while charging for digital infrastructure maintenance is a legitimate move, adding an 18% GST on top of the merchant fee creates unnecessary friction that could discourage businesses from adopting digital payment systems.
Under the current framework, standard UPI person-to-person transfers and payments up to ₹2,000 remain free for customers. Additionally, small merchants operating under the P2PM framework—those receiving up to ₹1 lakh per month via UPI QR codes—continue to be exempt from the fee. However, the introduction of the 0.4% MDR for larger transactions introduces a new cost structure for businesses, and Rangarajan’s suggestion aims to prevent an additional tax burden from compounding this expense.
Financial and operational risks associated with this rollout remain a key concern for the small business ecosystem. A primary issue is that many small and unregistered merchants are unable to claim input tax credit on the GST paid on these transaction fees. This means the tax becomes a direct cost that reduces their net margins. Furthermore, recent data suggests that a significant majority of merchants have expressed an unwillingness to absorb the 0.4% MDR. This raises the risk that businesses might either pass the cost on to consumers or, in some cases, revert to accepting cash to avoid the fee entirely, which could dampen the momentum of digital payment penetration.
Beyond the immediate cost implications, the transition presents logistical hurdles. Merchants are currently tasked with updating their billing and accounting software to accommodate the new fee structure before the mid-October deadline. Industry leaders, including BSE India MD and CEO Sundararaman Ramamurthy, have noted the broader importance of the UPI ecosystem in democratizing access to capital markets and financial services. However, as the platform evolves, the focus remains on ensuring that these infrastructure costs do not create barriers to financial inclusion.
The GST Council is currently evaluating the broader impact of this fee structure, with potential relief measures for small businesses on the table. The market will look to the council’s next meetings for clarity on whether the tax exemption on MDR will be granted, or if businesses will need to adjust their operations to account for the additional tax burden.