With Merchant Discount Rate (MDR) set to apply from 15 October on eligible person-to-merchant (P2M) transactions above ₹2,000 at 0.4%, a key question for consumers is whether merchants can recover this cost from them.
MDR is a charge paid by the merchant to the bank or payment service provider for accepting digital payments.
Union Minister for Communications Jyotiraditya M Scindia on Wednesday made it clear that any attempt by merchants to pass the cost of MDR on UPI to customers would violate the law and constitute a criminal offence, according to an ANI report.
Here’s what you need to know.
What does the law say about the prohibition on passing MDR to customers?
Amitraj Kaushal, Advocate at the Supreme Court of India, said the prohibition comes from Section 10A of the Payment and Settlement Systems (PSS) Act, 2007.
“The provision bars banks and payment system providers from imposing any charge on a person making or receiving a payment through notified electronic modes, and UPI transactions have been brought within this by notification,” he said.
This means MDR cost cannot legally be passed on to the customer, Kaushal added.
However, Eishan Agnihotri, Associate Partner at Pioneer Legal, highlighted an important distinction.
“For transactions below ₹2,000, there is a statutory bar on any additional charge being imposed under the Payment and Settlement Systems Act. Above ₹2,000, there is no statutory bar that is operative,” he said.
According to Agnihotri, the restriction on passing MDR to customers for transactions above ₹2,000 currently comes from NPCI’s merchant onboarding conditions, which state that MDR cannot be passed on to customers.
“A violation here will only be a contractual breach. It does not have the force of a statute or law as the PSS does,” he added.
How can it be established that MDR was passed on?
Kaushal said regulators would typically examine whether the final amount charged to the customer exceeds the actual price of the goods or services, with a separate line item such as “ charge” or “UPI surcharge” being a clear red flag.
However, Agnihotri said proving that the MDR cost was actually passed on to the customer could be more difficult when there is no separate charge.
“There are as of now no objective mechanisms prescribed that if any costs are being passed on to customers, they are to be mandatorily disclosed on the invoice or bill for MDR,” Agnihotri said.
A merchant could simply increase the price of a product or service to absorb the additional cost. In such cases, it would be difficult to establish that the price increase was specifically due to MDR, especially if the same price applies to all customers regardless of their payment method, he added.
What should customers look for on a bill and what should they do?
It can be difficult for consumers to identify surcharges, as these may be built into the price or described through a broad or ambiguous charge. Consumers should compare the final invoice with the advertised price and retain a copy of the price and payment receipt if they notice a surcharge, Siddharth Maurya, Managing Director, Vibhvangal Anukulkara noted.
From the standpoint of responsible retail, it is unethical to bury costs associated with payment in opaque or hidden charges, Raghunandan Saraf, Founder and CEO, Saraf Furniture, noted.
Saraf said customers should ensure that the selling price, taxes, and the final amount shown on the invoice agree with the listed price. Those using UPI should also check that no extra service fee has been charged.
If a customer finds an additional charge, the first step is to ask the merchant for a correct invoice with a breakdown of the amount and an explanation for the charge. If UPI acceptance is cited as the reason, customers should retain the UPI transaction record, bill, photos of the displayed price and any communication with the merchant, Maurya said.
These records can help establish the price originally displayed and the amount ultimately collected. If the issue is not resolved with the merchant, the customer may have to approach the consumer dispute resolution process, he added.
Disclaimer: This is only for informational and educational purposes. Please consult a qualified expert for the latest laws and regulations.