New Bill puts free UPI under threat. It deserves debate in Parliament, discussion with citizens

The government’s framing was aimed at simplifying compliance, attracting capital, and providing “tax certainty” at a moment of what the Bill itself describes as evolving geopolitical disruption to global trade. Two provisions buried inside this omnibus legislation deserve more scrutiny than they got in Parliament — one because it touches nearly every Indian with a smartphone, the other because it quietly reshapes how India competes for global capital. Read together, they tell a story less about simplification and more about who the tax code is optimised for now.

The UPI amendment

Section 10A of the Payment and Settlement Systems Act, 2007 has, since January 2020, kept the Merchant Discount Rate (MDR) at zero for UPI and RuPay debit transactions. This was the legal firewall that made India’s digital payments free for merchants. The 2026 Bill amends this section to let the central government notify, by executive order, which digital payment modes stay free, and which may attract charges in future. Parliament effectively handed itself an exit ramp from a five-year-old commitment, without spelling out where that ramp leads.

UPI processed 24,161.69 crore transactions worth Rs 314.23 lakh crore in FY26 (roughly $3.56 trillion), up from Rs 84.16 lakh crore just four years earlier. That is not a niche fintech product. It is the plumbing of India’s retail economy, with 55.49 crore users onboarded as of June 2026. The zero-MDR regime was never free for the exchequer either. The government has run a parallel incentive scheme reimbursing banks and NPCI, with outlays that climbed from Rs 1,389 crore in 2021-22 to Rs 3,631 crore in 2023-24. The Payments Council of India has argued for years that this subsidy model is unsustainable and has formally petitioned the government to reconsider zero MDR, noting that of roughly 6 crore digital-accepting merchants, about 90 per cent are small enough that any new charge would land disproportionately on them unless carefully tiered.

Sitharaman has pushed back on Congress leader Jairam Ramesh’s charge that this opens the door to charging ordinary users, clarifying that MDR by definition applies to merchants, not customers, and that any actual rate will be decided later by an NPCI-led steering committee, not by this Bill. That is technically accurate, but it sidesteps the economics. Merchant costs are rarely absorbed silently; they tend to surface as price adjustments, minimum-transaction thresholds, or a quiet preference for cash, particularly among small retailers with thin margins. A policy shift of this magnitude, decoupling a five-year zero-cost guarantee from statute and handing the rate-setting power to notification, arguably deserved the parliamentary debate it never got — especially given Ramesh’s separate allegation, still unverified, that the change may be connected to US pressure over India’s zero-fee payments ecosystem undercutting American card networks.

Courting capital

The Bill’s second major thrust is squarely aimed at foreign capital and manufacturing. It cuts the eligibility conditions for fund managers relocating to India — a long-standing GIFT City ambition — from 13 down to just 5. It is a genuine compliance simplification that fund-management lobbies have sought for years. It also strips away notification requirements for foreign companies using Indian-owned data centres and extends exemptions to foreign electronics and diamond-trade companies.

The most striking measure is a 15-year tax exemption, running to 2041, for foreign companies storing electronic components in customs-bonded warehouses before supplying Indian contract manufacturers. This long horizon is a deliberate wager on electronics manufacturing as India’s next export engine. Capital-intensive supply chains require policy stability measured in decades rather than budget cycles; such long-term commitment is essential to compete credibly against Vietnam or Mexico for relocating factories.

The asymmetry is the analytical crux. Foreign fund managers and electronics manufacturers get a 15-year runway and a lighter compliance load. Domestic merchants — the overwhelming majority of them small, informal-economy operators newly formalised by UPI itself — get a provision that opens the door to new charges with no comparable long-term protection or phase-in commitment written into the statute. Both moves may be individually defensible on their own economic logic; investment certainty for capital-intensive manufacturing is not the same problem as payments-ecosystem sustainability. But a single “consolidating” Bill quietly pursuing both, passed without debate, invites the question of whether domestic stakeholders got the same hearing as international ones.

None of this argues against the Bill’s core economic logic. But process is not a footnote to substance. A provision restructuring the payment habits of over 55 crore users deserves a published rate framework, a transition timeline, and an explicit small-merchant carve-out before Parliament votes — not after, via a steering committee insulated from legislative scrutiny. The more useful debate is not whether India needs tax certainty for capital, but whether it can extend the same certainty to the people already inside its payments system.

Mohan is dean and professor of Economics, O P Jindal Global University (JGU). Subramoniam is with the Centre for New Economics Studies (CNES), JGU