Former Reserve Bank of India Governor C. Rangarajan has said there should be no goods and services tax on the merchant discount rate, or MDR, associated with Unified Payments Interface transactions, sharpening a policy debate at the intersection of digital finance, taxation and financial inclusion. His intervention comes as India continues to expand UPI as the backbone of retail digital payments, while policymakers remain under pressure to keep transaction costs low for merchants and consumers.
Tax Policy Debate
Rangarajan's position is significant because it frames the issue not merely as a technical tax matter, but as a question of public policy design. MDR is the fee paid by merchants to payment service providers for processing digital transactions. In the case of UPI, the government has repeatedly sought to keep the system low-cost or free for users in order to accelerate adoption, especially among small businesses and first-time digital users.
If GST is imposed on MDR, the effective cost of accepting digital payments could rise for merchants, particularly micro and small enterprises that operate on thin margins. That, in turn, could weaken the incentive to accept UPI at the point of sale, even if consumers continue to prefer it. Rangarajan's argument suggests that taxing the fee structure around UPI would run counter to the broader national objective of deepening digital payments penetration.
The former central banker's remarks also reflect a wider concern among economists that taxation should not inadvertently penalise public-interest digital infrastructure. UPI has become one of India's most visible financial technology successes, enabling instant, interoperable transfers at scale. Any policy that increases friction in the ecosystem risks slowing the momentum that has made India a global reference point for retail digital payments.
Merchant Cost Concerns
The debate over MDR is especially relevant for small merchants, who are often the most sensitive to transaction costs. For larger retailers, digital acceptance is typically integrated into broader payment systems and accounting workflows. For neighbourhood stores, street vendors and small service providers, however, even modest charges can influence whether they choose to promote or discourage digital payments.
Industry participants have long argued that if the government wants to preserve the rapid growth of UPI, it must ensure that the cost burden does not shift back onto merchants through indirect taxation. Rangarajan's comments reinforce that view, and may add intellectual credibility to calls for a more supportive framework for digital acceptance.
The issue also has fiscal implications. GST on MDR would generate some tax revenue, but the broader economic trade-off is whether that revenue is worth the possible slowdown in digital adoption. In a country where formalisation and traceability of transactions remain policy priorities, any measure that nudges users back toward cash could be counterproductive.
Digital Payments Stakes
The larger significance of Rangarajan's intervention lies in the direction it points for India's digital economy. UPI is no longer just a payments rail; it is increasingly central to the country's financial inclusion strategy, small-business digitisation and the government's broader push toward a less-cash economy. That makes the policy architecture around it unusually important.
A tax on MDR may appear narrow, but in practice it touches the economics of the entire ecosystem: banks, payment aggregators, merchants and consumers. Policymakers must therefore weigh not only direct tax collection, but also the behavioural effects on adoption, compliance and transaction volumes. Rangarajan's stance suggests that the government should avoid measures that could undermine confidence in digital payments at a time when usage is still expanding.
The remarks are likely to resonate in policy circles because they come from a figure with deep institutional credibility in monetary and financial governance. While the government has not indicated any immediate move to impose GST on MDR for UPI, the issue remains a live one in the broader conversation over how India should finance and regulate its digital public infrastructure.
For now, Rangarajan's message is clear: if UPI is to remain a low-friction public utility rather than a cost-heavy commercial service, tax policy must be designed to support, not burden, its use.