India’s small retailers are raising concerns over the proposed merchant charge on higher-value UPI payments, warning that even a modest fee could make cash more attractive just as the festive shopping season gets underway.
From October 15, merchants will pay a 0.4 percent merchant discount rate (MDR) on UPI person-to-merchant transactions above ₹2,000. Consumers will not pay the charge. The MDR will be capped at ₹300 for transactions of ₹75,000 and above.
Retailers’ associations fear the move could slow the shift towards digital payments and weaken the formalisation of small businesses.
A bigger concern for small retailers is the ₹1 lakh monthly UPI collection threshold for retaining zero-MDR protection.
The Retailers Association of India (RAI) has argued that the threshold, equivalent to just ₹12 lakh in annual digital receipts, is too low for many micro businesses.
India has more than 90 million enterprises classified as micro enterprises, with around 90 percent operating below the GST threshold, according to the association.
RAI and the All India Consumer Products Distributors Federation (AICPDF) want the threshold substantially increased so that more small retailers can continue accepting UPI without MDR.
A 0.4 percent MDR could make cash more attractive for transactions above ₹2,000.
Festive-season purchases frequently exceed the threshold.
Smaller retailers operate on thin margins and may find it difficult to absorb another transaction cost.
A shift to cash could reduce the digital trail of business transactions.
Retailers argue that bank-account-linked UPI payments should not be treated like credit-linked transactions.
The timing has added to retailers’ concerns. The new charge is scheduled to begin just before the peak festive shopping period, when transaction volumes typically rise.
The Clothing Manufacturers Association of India has also expressed concern about introducing MDR at this stage, particularly for businesses already operating with tight margins.
The India SME Forum is surveying MSMEs on transaction values, margins and the likely impact of MDR. The forum has maintained that UPI is essentially an account-to-account payment system and that any merchant charge should be cost-based and transparent.
Petrol pump dealers have also joined the pushback against the proposed MDR. The All India Petroleum Dealers Association has sought a blanket exemption for fuel stations, irrespective of transaction value.
The association has pointed out that fuel purchases are often high-value transactions while dealers operate on regulated margins. It has also argued that dealers cannot simply increase fuel prices to recover payment-related costs.
The association has sought exemption from both percentage-based MDR and the proposed flat ₹5 charge per transaction.
Retailers argue that keeping UPI free has benefits beyond payment convenience. Digital payments create a transaction trail that can help businesses build formal financial records, improve access to credit and strengthen tax compliance. A shift in some transactions back to cash could weaken these benefits.
Industry representatives have therefore argued that the wider economic gains from UPI — including lower cash-handling costs, greater formalisation and improved access to credit — could outweigh the revenue generated through MDR.
Some estimates have put the potential MDR revenue at around ₹16,000 crore.
The Finance Ministry has rejected concerns about a rollback and stressed that MDR is a charge within the merchant-payment ecosystem, not a fee imposed on consumers using UPI.
Individuals will continue to have unlimited free UPI usage without monthly quotas, volume restrictions or tiered caps, according to the ministry.
The new system therefore leaves consumers outside the direct impact of MDR. The debate is instead shifting to who should bear the cost of India’s rapidly expanding digital payment infrastructure — merchants, banks and payment companies, or the government.
For small retailers, the immediate concern is whether adding even a small cost to higher-value UPI payments will change customer and merchant behaviour when cash remains readily available.
