Government's Proposed Tax on UPI Transactions

The government has introduced a proposal for taxing Unified Payments Interface (UPI) transactions through an amendment to Section 10A of the Payment and Settlement Systems Act, 2007. This move allows the government to notify charges on specified electronic payment modes.

Key Details of the Proposal

• The proposed tax is a Merchant Discount Rate (MDR) of 0.25–0.5% on UPI transactions exceeding ₹2,000.
• While only about 5% of transaction volume would be affected, the tax would cover approximately 65% of transaction value.

Background and Concerns

This tax proposal runs counter to a decade-long policy of promoting cashless transactions, especially post-demonetization in 2016. UPI was crucial in this shift, and the zero-MDR policy was a deliberate strategy to encourage electronic payments.

Implications of the Tax

• Economic Impact: Taxing two-sided markets like UPI is complex. The costs could ultimately fall on merchants, consumers, or intermediaries (banks and PSPs), potentially leading to reduced service quality or innovation.
• Financial Inclusion: UPI has played a significant role in financial inclusion by formalizing transactions. Taxation could deter usage, undermining inclusion goals.
• Changing Usage Patterns: Taxing UPI might shift payment mode preferences, affecting its usage.

Conclusion and Suggestions

The proposal is positioned as a targeted measure for large-value transactions, but there are concerns about its long-term implications. It is suggested that the government refrain from taxing UPI to allow its network effects and financial inclusion benefits to continue, and consider alternative revenue sources.