CBDT directs banks to refund charges collected for UPI and other digital payments since Jan 1

In what will be a relief for merchants and consumers accepting or making digital payments, the Central Board of Direct Taxes (CBDT) has issued a circular that directs all banks to stop applying any charge on payments made via the prescribed electronic mode of transactions.

The circular, released on August 30, also mentioned that banks will have to refund the charges collected on payments made via UPI, Rupay debit card, QR Code or as MDR on transactions made on or after January 1, 2020.

Additionally, CBDT has also advised all banks not to impose any charges on any future transactions carried through the aforementioned prescribed electronic modes.

For the unaware, MDR is the rate or processing fee charged to a merchant to assist the transactions made via credit or debit cards. This fee is charged by banks that range anywhere between 1%-3% of the overall amount. 

MDR was reduced to zero for UPI, Rupay and QR Code by Finance Minister Nirmala Sitharaman in December 2019 and the exemption was applicable from January 1, 2020. However, some banks have been charging a fee on UPI transactions as mentioned in the circular which forced India’s apex body on direct taxation to initiate action.

“Some banks are imposing and collecting charges on transactions carried out through UPI. A certain number of transactions are allowed free of charge beyond which every transaction bears a charge. Such practice on part of banks is a breach of section 10A of the PSS Act as under section 269SU of the IT Act. Such breach attracts penal provisions...,” the circular said.

It’s worth noting that private banks have been reportedly charging a fee, varying from Rs 2.5 to Rs 5, on peer-to-peer (P2P) payments via UPI if the number of transactions exceeds 20 in a month. According to private banks, they have introduced charges to prevent frivolous transactions and reduce unnecessary burden on the system.

Queries sent to NPCI, which regulates UPI, Rupay and UPI-powered QR Code, did not elicit an immediate response. We’ll update the post as and when they respond.

While CBDT’s circular said that they received representations on MDR charges being collected on transactions made via UPI, a recent report by RBI had said that no or zero MDR had a negative impact on the payments ecosystem. The banking regulator had also recommended allowing a lower fee instead of reducing MDR to zero.

Besides RBI, NPCI’s CEO, Dilip Asbe had also extended his support and emphasised that MDR should be brought back because it funds the acceptance, servicing and acquiring infrastructure for UPI.