What the ToLA Bill Means for UPI's Free Merchant Model
The Indian government has moved to create legal headroom for charging merchants on UPI and other digital payments, introducing the Taxation and Other Laws (Amendment) Bill, or ToLA, in the Lok Sabha. Finance Minister Nirmala Sitharaman tabled the Bill, which among other provisions amends the Payment and Settlement Systems Act, 2007.
The key amendment would bar banks and system providers from imposing any charge, directly or indirectly, on a person making or receiving a payment through electronic modes that the central government notifies. In effect, the Finance Ministry would decide which instruments, payer categories and transaction thresholds are exempt. Any electronic payment mode outside that exempt list could attract Merchant Discount Rate, the fee merchants pay to banks and payment processors for processing digital transactions.
Sources told BusinessLine that the enabling provision could pave the way for MDR on UPI, though nothing has been finalised. Today, credit cards in India typically carry an MDR of about 1.5 per cent and debit cards up to 0.9 per cent, while UPI transactions are free for merchants. Two possible approaches have been reported: capping free UPI transactions and charging MDR above a set threshold, or levying a fee based on a merchant's annual turnover. Sources declined to confirm or deny either option.
UPI currently processes nearly 23 billion interoperable payment transactions every month, making it one of the world's largest retail payment rails. If MDR is introduced, the immediate burden would fall on merchants rather than consumers, since the Bill explicitly protects people making or receiving payments through notified modes. The next milestone is passage of the Bill, followed by a Finance Ministry notification spelling out which modes remain on the exempt, or negative, list.
Why UPI's Economics Are Driving India's MDR Debate
Why UPI's Free Model Is Under Pressure
UPI's zero-MDR design helped it become India's dominant payment method, but it left banks, fintechs and system providers to absorb the cost of running the network. Pine Labs CEO Amrish Rau made this case publicly, arguing that IT, innovation and cyber security costs have risen by almost 300 per cent over the past 12–24 months, while investment in the ecosystem has been near zero for six years. He says UPI needs continued funding to reach 90 per cent penetration and expand globally, and that some recovery of investment is justified through merchant-side fees, provided person-to-person transfers and consumer charges remain zero. That is an industry position, not official policy, but it helps explain why the monetisation debate is gaining momentum.
How MDR Would Reshape Merchant Economics
MDR is paid by merchants, so the immediate potential losers are businesses that accept UPI, especially high-volume sellers. Under the two reported options, small merchants could be shielded through a turnover threshold or a cap on free transactions, leaving larger merchants to bear the new cost. Banks and payment processors would gain a new revenue stream on a rail processing roughly 23 billion transactions a month. The competitive mix could also shift: if UPI's MDR rises toward card levels, its cost advantage over credit and debit cards narrows, and merchants may route transactions to the cheapest instrument. Because rates and thresholds are still unsettled, these are scenarios rather than confirmed outcomes.
What the Bill Does and Does Not Do
The ToLA amendment creates authority; it does not by itself impose any fee. The central government must first notify which electronic modes of payment are protected from charges. Anything outside that negative list becomes potentially chargeable. The wording also leaves room for different treatment of categories of payers and thresholds, which is how a big-merchant-only UPI fee could be implemented. The parliamentary process may still change the design, so the practical impact on merchants and payment firms will only become clear once the Finance Ministry publishes its list after the Bill is enacted.
How Merchants, Banks and Fintechs Should Prepare for a Possible UPI MDR
With the enabling legislation moving through Parliament, payments industry participants should prepare for the details rather than wait for the final notification.
- High-volume UPI merchants should model cost impacts under both reported options — a cap on free transactions above a threshold and a turnover-based merchant fee — using their own monthly UPI volumes against the roughly 23 billion national transaction figure.
- Banks and payment processors should prepare systems to identify exempt categories as soon as the Finance Ministry notifies the negative list, since the law will bar direct charges on notified modes while leaving all other modes chargeable.
- Fintechs should treat any future MDR as merchant-side revenue recovery, not as a licence to charge consumers: the Bill's no-charge clause protects persons making or receiving payments through notified electronic modes.
- Investors and industry participants should track the Bill's passage through both houses of Parliament and watch for amendments to the threshold or turnover-based exemption design.
Risk & Opportunity Assessment
| Commercial Risk | Medium | A UPI MDR would create a new cost for merchants and a new revenue stream for payment firms, but rates, thresholds and the shape of the negative list are still undecided, leaving near-term commercial outcomes uncertain. |
| Competitive Risk | Medium | If UPI no longer has a zero-cost advantage over cards and wallets, merchant routing choices could change; the magnitude depends on whether the MDR is set near card levels and which merchant categories are exempt. |
| Regulatory Risk | High | The Bill delegates broad notification powers to the central government, and the actual instruments, thresholds and exempt categories will only be known after enactment; parliamentary changes could also alter the design. |
| Reputation Risk | Medium | UPI is widely perceived as free public digital infrastructure, and any move to add merchant fees could trigger political and consumer backlash, even though direct consumer charges are barred by the Bill. |
| Technology Disruption | Low | The Bill changes the monetisation model of existing payments infrastructure rather than introducing new technology; the bigger shift is economic, not technological. |
| Commercial Opportunity | High | With nearly 23 billion UPI transactions processed monthly, even a modest merchant-side MDR would create a significant recurring revenue pool for banks and fintechs, while the reported exemption structure would keep small merchants on board. |
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