Centre May Introduce UPI MDR Charges, Extend Tax Incentives for Contract Manufacturing
The Centre is working on important reforms that might allow charging of Merchant Discount Rate (MDR) on large UPI transactions, but maintain UPI free for consumers. The reforms also seek to prolong tax incentives to foreign companies supplying machinery to contract manufacturers till 2041.
For big merchants who accept UPI payments, the government has started to change the current legislative framework so that they can charge a Merchant Discount Rate (MDR). At the same time, the government has suggested extending the tax incentives for foreign companies that sell machinery to contract manufacturers for another decade, until 2041. This would help domestic electronics production and global majors like Apple.
As part of the Taxation and Other Laws (Amendment) Bill, which is anticipated to be introduced in Parliament on 4 August, several provisions are included. Media outlets have covered the proposed changes to the Income Tax Act 2025, the Payment and Settlement Act 2007, and the Finance Act 2026, as well as the repeal of the Income-tax (Amendment) Ordinance, 2026. This ordinance would exempt foreign investors' interest and capital gains from taxes on G Sec.
Govt. Proposed Amendments to Payments Act
To alter the current system for identifying fee-free payment instruments, the government has proposed changes to the Payments Regulatory Board/Payments Act framework. Using MDR with UPI or RuPay debit cards is now illegal according to the law. Rather than explicitly stating which payment instruments are exempt from charges, the proposed modification would give the Central Government the authority to announce their exemption.
The change to Section 10A, which prevented banks and payment companies from charging MDR on UPI payments, has been suggested to be repealed by the Finance Ministry. Banks and payment processors collect MDR from businesses whenever they process digital transactions.
Users will not be charged for using UPI in any of the proposed changes. The bill promised to amend Section 10 A of the Payment and Settlement Systems Act, 2007 (in Clause 2) so that it no longer refers to the Income Tax Act and states that no bank or system provider can charge anyone, directly or indirectly, for using electronic payment methods that the government notifies. This also means that a Merchant Discount Rate (MDR) fee can be applied to UPI and RuPay debit card payments made to big merchants like Amazon and Flipkart, according to the proposal of the finance ministry in the amendment bill.
Govt. Backing the Electronic Manufacturers
A more precise list of "specified electronic goods" would replace the current vague reference to "electronic goods" in the bill, which would provide electronic goods manufacturers more assurance. Additionally, it adds another decade to the tax exemption, bringing it to the fiscal year 2040–41.
The contract manufacturer will be granted the exemption if they create certain electronic goods for the benefit of the foreign corporation. In addition to the final items already stated, the term "specified electronic goods" can also refer to mobile phones, laptops, all-in-one personal computers, tablets, servers, and ultra-small form factor (USFF) components.
