Fee, Tax Or Commercial Charge?: Supreme Court Seeks RBI's Response On Statutory Source & Executive Scope Of UPI MDR Levy, Refuses Stay

The Supreme Court has issued notice in a writ petition challenging the constitutional validity of recent statutory amendments and regulatory frameworks that reintroduce Merchant Discount Rate (MDR) charges on UPI person-to-merchant (P2M) transactions exceeding ₹2,000.

The Court declined to grant an interim stay on the framework, observing that the issue appears to be more technical than legal, while directing the Reserve Bank of India (RBI) to file an affidavit explaining the executive scope, statutory source, and underlying mechanism of the transaction charges.

A writ petition was filed seeking quashing of the notification, decision, circular, framework and consequential directions dated Sept 15, 2026, insofar as they impose MDR on UPI P2M transactions above Rs. 2,000 and, if applicable under the operative instrument, on RuPay debit-card payments, as lacking a valid source of power and being ultra vires Articles 14 and 19(1)(g).

The Bench comprising Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice V Mohana ordered, "Issue Notice...The counter affidavits maybe filed within four weeks. List the matter on so and so date."

The Counsel for the Petitioner submitted, "By virtue of this UPI MDR Act, MDR has been imposed on these UPI transactions. Kindly appreciate, since UPI came into effect, there were circumstances which reduced the black money part of it."

Chief Justice Kant said, "That’s I have read in the morning in the newspaper...This is only a follow-up action on notice. Now there is something known as the advance arguments."

Additional Solicitor General N Venkataraman, for the RBI, submitted, "Before issuing notice, consider the following. Wait for a minute, it’s important. It is yet to come; it's likely to come only on October 15th, the first milestone. Two, 96% of the people using the gateways are exempt. That is the first threshold. So this can be considered: One, amongst the remaining 4%, essential services are capped at ₹5. Three, there is a value cap; any threshold to the merchant beyond ₹75,000 is capped at ₹300. Whether it’s 1 crore, 10 crore, or 100 crore, it’s capped at ₹300 and the collection charges at the moment are less than half a percent with all these limitations."

Chief Justice Kant said, "This is exactly what we need. All these facts on a short affidavit will help us in understanding, because based on the amendment, this is less of a legal issue and more of a technical issue in fact."

The Counsel for the Petitioner submitted, "The so-called details of the charges and other things that have been given are only in the press release on September 15th, the next day. On the very first day, when the amendment was made on September 14th, it was only the UPI capped at 2,000 that was given."

Venkataraman said, "It ultimately reaches a scarce, thin population."

Justice Bagchi asked RBI, "It’s not a tax or a fee...what is the executive scope of making this expropriation on the transaction? What is the service rendered? we would like that explanation on affidavit. We would have understood it being a fee. And if it is a fee, it requires legislative intervention. It could not have been an executive fee."

Venkataraman submitted that it is not a tax or a levy/fee and it is not a statutory collection by the Government of India.

The Bench further questioned whether the levy amounted to an executive expropriation or an incidence of taxable income under Section 269SU of the Income-tax Act. RBI clarified that the charge was neither a tax, nor a fee, nor a statutory levy collected by the Central Government. Instead, it functioned purely as a commercial settlement fee among market intermediaries, specifically the acquiring banks and platform aggregators, to sustain the digital payment infrastructure. Drawing a parallel to credit and debit card card-swiping mechanisms, counsel explained that the fee compensated the five key stakeholders responsible for executing real-time debit and credit settlements. It was submitted that the Central Government did not retain any portion of the settlement amount.

Regarding Section 269SU of the Income-tax Act, it was contended that it functioned merely as a machinery provision recognizing permissible digital payment modes, akin to the statutory thresholds under Section 269ST/269UD governing cash transactions. The provision did not alter the tax character of the underlying transaction or the nature of the receipts.

An oral prayer for interim stay was raised by counsel for the petitioner, citing market disruption and photographs showing vendors refusing UPI payments. The Court, however, declined to pass any interim orders at that stage.

The Plea prayed, "Declare that Section 10A of the Payment and Settlement Systems Act, 2007, insofar as it stands substituted / amended by the Taxation and Other Laws (Amendment) Act, 2026, is unconstitutional and void, having been enacted through the procedure applicable to a Money Bill under Article 109 read with Article 110 of the Constitution when it does not fall within Article 110(1)(a) to (g), and consequently quash the impugned Gazette Notification No. S.O. 5067(E) dated 14.09.2026 and the MDR framework announced on 15.09.2026, both being founded on and referable to the said unconstitutional amendment"

It was also prayed to declare Section 2 of the Taxation and Other Laws (Amendment) Act, 2026, Act No. 21 of 2026, insofar as it substitutes the material words of Section 10A of the Payment and Settlement Systems Act, 2007, unconstitutional and void for excessive delegation, legislative abdication and manifest arbitrariness in violation of Articles 14 and 19(1)(g) of the Constitution.

The plea prayed, "Direct the Respondents to place on record the complete authenticated notification/circular, statutory source, amendments, committee constitution, agenda, minutes, cost study, impact assessment, stakeholder inputs, rate methodology, distribution formula, RBI approval and enforcement safeguards;...Declare that no MDR or analogous compulsory charge may be imposed or recovered merely on the strength of a press release or FAQs absent a duly authorised, authenticated and published statutory instrument."

It also sought directions for creation of an enforceable anti-pass-through framework including disclosure on invoices and merchant dashboards, a complaint and audit mechanism, penalties for hidden fees, and restitution for unlawful collection;

Accordingly, the plea was listed on a further date.

Cause Title: Anjan Datta v. Union of India and Ors. [Writ Petition (C) No.1199/2026]