MSME retailers might shift to cash to avoid MDR burden: Retailers Association of India

Representational Image. File pic.

The recent levy of Merchant Discount Rate (MDR) on transfers worth more than Rs 2,000 made to merchants through the UPI platform, has caused concern among the retailers during the festive season, with the Retailers Association of India cautioning that it could prompt small retailers to move to cash, undoing years of progress in digital payment adoption.

The government on Tuesday had introduced 0.4 per cent charge on Unified Payments Interface (UPI) payments above Rs 2,000 to merchants and capped the fee at Rs 300 for payments of Rs 75,000 and above, from October 15, ending nearly six years of fully free UPI payments.

The extra burden could act as an incentive to go towards cash transaction

"For MSME retailers already running on thin margins, burden creates a straightforward incentive to steer transactions back toward cash," The Retailers Association of India (RAI) said in a statement.

The association, which claims to represent players ranging from large-format and specialty retail to e-commerce and quick commerce, pointed out that with festive season underway and the cost burden placed on the merchants, this might hurt the government's digitisation push.

"Small merchants will now think twice about whether to accept cash or UPI," said RAI CEO Kumar Rajagopalan said. "During the festive season, a large share of transactions crosses the Rs 2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance," he added.

The retail body stated that the shift back to cash would also hurt the government's own formalisation push, as transactions that move off the UPI network no longer feed into GST reporting.

"This cuts against the government's own formalisation agenda," Rajagopalan said, adding, "UPI acceptance should be incentivised, not taxed."

RAI to pursue MDR issue with NPCI, Finance Ministry

The retail association objected against treating all the UPI transactions as one category, stating that most UPI payments draw directly from a savings or current account the digital equivalent of a debit transaction, carrying none of the interchange cost or credit risk that justifies a fee on credit networks.

"We don't see the case for charging a bank-to-bank UPI payment the way you'd charge for credit," Rajagopalan said.

"Where UPI is linked to a credit line, a fee is easier to defend, because the cost structure genuinely
resembles a credit product. We urge that the government should bear the cost of normal UPI transactions since it repays the government with GST and traceable transactions instead of cash transactions," he added.

"The state gets a formal, traceable transaction it can tax out of every UPI payment. It should be
paying for the enablement, not passing the bill down to the smallest retailer in the chain," he further said.

RAI said it will pursue the issue with the National Payments Corporation of India and the Ministry of Finance, seeking a graded structure that separates debit-linked from credit-linked UPI transactions.

Impact during festive season

Similarly, Clothing Manufacturers Association of India (CMAI) said it is likely to impact the sellers during the festive season.

"Introducing MDR on UPI at the start of festive season could not have come at a more challenging time for the industry. This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins. Adding another cost to digital transactions at this juncture risks putting further pressure on an ecosystem that is still finding its footing," Santosh Katariya, President, Clothing Manufacturers Association of India (CMAI) said.

"UPI has been a powerful enabler of consumption and formalisation and any move that increases the cost of acceptance needs to be carefully calibrated, particularly during the most important sales period of the year," he added.

Govt levies MDR on payments to merchants above Rs 2,000

On Tuesday, the National Payments Corporation of India (NPCI) that operates UPI, said an MDR of 0.4 per cent will be levied on Person to Merchant transactions above Rs 2,000, while MDR will be capped at Rs 300 per transaction on high-value payments of Rs 75,000 and above.

Essential sectors like telecom, insurance, fuel sectors will pay a flat MDR of Rs 5 per transaction, while payments towards mutual funds, and stock brokers will attract an MDR of 0.02 per cent, capped at Rs 300.

However, small merchants receiving up to Rs 1 lakh per month will have mandatory zero MDR for all transactions.