Taxation and Other Laws (Amendment) Bill and the UPI levy

Why in the News

The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on 6 August 2026. The Bill gives legal backing to modify the zero charge regime on some digital payments. Analysis links the move to United States trade pressure over digital payment barriers.

What is the zero Merchant Discount Rate regime on UPI and RuPay?

1. Merchant Discount Rate (MDR): the fee a merchant pays to banks and card networks for processing a digital payment.
2. Zero MDR rule: since 2020 India has barred any charge on Unified Payments Interface (UPI) and RuPay debit card transactions.
3. Effect on users: UPI stays free at the point of payment, which drove mass adoption.
4. Bill change: the amendment removes the link between the Payment and Settlement Systems Act, 2007 and the Income Tax Act, and lets the government modify the zero charge regime.
5. Scope: any charge would apply to merchants, not end users, and the steering committee headed by the National Payments Corporation of India (NPCI) is yet to decide.

What else does the Bill do?

1. Manufacturing: it aims to promote domestic electronics manufacturing.
2. Foreign capital: it replaces a June ordinance that exempted interest income and capital gains earned by Foreign Portfolio Investors from government securities.

Why is the change linked to United States trade demands?

1. Section 301 lever: the United States Trade Representative (USTR) runs a Section 301 investigation, a tool to act against foreign trade barriers.
2. Barrier tag: in March 2026 USTR classified India’s digital payment policies as favouring domestic players.
3. Lost business: Visa and Mastercard cite lost potential business as Indian consumers shifted to free UPI.
4. Market cap concern: USTR flagged that two United States owned providers processed over 80 percent of UPI transactions, alongside the 30 percent cap on third party apps.
5. Precedent: India earlier scrapped the 6 percent equalisation levy on digital services under similar pressure.

What are the concerns around the levy?

1. Adoption risk: charges could slow UPI use if passed to merchants and then to prices.
2. Policy autonomy: critics read the change as a concession under trade negotiation rather than domestic reform.
3. Revenue pool: an interoperable zero cost platform limits card network fee income, which the change could restore.

Conclusion

The Bill gives the government legal power to end the blanket zero charge regime on UPI and RuPay. The MDR decision itself rests with the NPCI led steering committee. The measure sits inside the wider India United States trade negotiation over digital payment barriers.

Matching Previous Year Question

[2026] Which one of the following best describes the key objective of India’s ‘Open Network for Digital Commerce’ (ONDC) initiative?
(a) To allow digital government control over all digital commerce transactions
(b) To replace private e-commerce players
(c) To break the dominance of large e-commerce platforms by enabling interoperability across networks
(d) To mandate UPI-based payments for all online transactions
Answer: (c)