In a clear indication that the Central government will not change its policy on merchant discount rate (MDR), the Central Board of Direct Taxes (CBDT) has directed banks to return to customers and merchants any fees they may have collected for facilitating Unified Payment Interface (UPI) transactions this year. The CBDT circular, issued on Sunday, noted that such charges are a violation of the Income Tax Act, and would attract penal provisions.

The circular noted that per Section 10A of the Payment and Settlement Systems (PSS) Act 2007, UPI payments and RuPay debit card-powered transactions could not attract any charges. It said that a circular issued in December 2019 had reiterated that under Section 10A, merchant discount rates (MDR) would not be applicable from January 1, 2020. It read: “However, representations have been received that some banks are imposing and collecting charges on transactions carried out through UPI […] Such practice on part of banks is a breach of section 10A of the PSS Act as well as section 289SU of the IT Act.” The banks were directed to immediately refund any charges they may corrected this year.

Banks charging fees on money ‘transfers’ would have to stop

Of late, banks such as including ICICI, HDFC and Axis had started collecting fees on money transfers for after the first 20 person-to-person (P2P) transactions in a month. Ashish Das of the Department of Mathematics, IIT Bombay wrote in a report in August 2020 that banks were doing this by defining “payments” as separate from “transfers”.

Das explained that banks had interpreted the diktat to suit them, by defining “payments” as transactions between person-to-merchant (P2M) transactions, and “transfers” as person-to-person (P2P). Since provisions in the the PSS Act only mention the word “payment”, banks have interpreted them as payments made to merchants.

Das noted that there are no grounds for such a difference. “So long as a transaction is done through UPI, by virtue of UPI being a payments interface, there is no ground (as per extant laws) to consider an account-to-account funds transfer as not being a payment,” he wrote in his paper.

Banks have been against MDR waiver

In July, Dilip Asbe, CEO of National Payments Corporations of India (NPCI), had said that the waiver on merchant discount rates on digital payments would slow down their deployment in the country. NPCI is owned by a consortium of the country’s major banks.

Speaking at a panel discussion, as reported by the Economic Times, Asbe said that while the industry understood the need for a Zero MDR regime, it needed funds to deploy the payment systems. Asbe said NPCI was holding discussions on the possibility of bringing back MDR.

MediaNama’s take on Zero MDR

In January, after MDR on digital payments was removed, MediaNama had had written that the move raised several concerns:

  • Removes incentive for banks to roll out digital payments infrastructure: The move disincentivised the growth of digital payments for banks, since it is no longer a source of income for them. Ultimately, the move would lead to a the digital payment industry to have no business or revenue model
  • Could lead to monetisation of user data, and privacy violations: With no other income streams, a UPI app would have no other incentive to exist but to collect and sell user data to other financial entities. Such a market incentive, inherently perverse, could result in privacy violations.