New Delhi: UPI transactions between individuals and merchants worth over Rs 2,000 will be subject to a merchant discount rate (MDR) starting next month, the government said, a month after parliament passed a law allowing for such levies on the as-yet free payment system.Transactions between individuals will continue to be free when the new MDRs kick in on October 15, the National Payments Corporation of India (NPCI) said on Tuesday, stating that the levy will generate funds that can be used to improve UPI and bolster its security.While person-to-merchant UPI payments of up to Rs 2,000 will also remain free, those over this threshold will incur an MDR of 0.4%, with a cap of Rs 300 per transaction.Such payments made with merchants in essential and low-margin sectors including the railways, telecom, fuel and insurance will however attract a flat MDR of Rs 5 per transaction.Payments towards mutual funds, securities, stockbrokers and dealers will incur an MDR of 0.02%, also capped at Rs 300 per transaction.Small merchants including vendors on the street will be exempt from MDR as long as they receive less than Rs 1 lakh a month via UPI payments categorised as person-to-person-merchant transactions.MDRs levied on merchants will be distributed between banks, payment service providers and UPI application providers. The Union finance ministry said on Tuesday that banks “have been advised to ensure that merchants do not pass MDR charges on to customers”.These charges will apply to some 4% of merchant transactions, the ministry said. Various media outlets have noted that though person-to-merchant UPI payments over the Rs 2,000 threshold make up 4% of the total number of such exchanges, they account for 67% of the total value.A dedicated fund will also be set up to promote UPI adoption among small merchants and into which 5% of all MDR collections will be transferred, the government said.Earlier this week the finance ministry issued a notification enabling the new MDR policy. Last month parliament passed the Taxation and Other Laws (Amendment) Bill that paved the way for such levies.‘Why should Indian merchants finance foreign platforms?’Trade expert Ajay Srivastava of the Global Trade Research Initiative said on Tuesday that the MDRs are most poised to benefit PhonePe, in addition to Google Pay, both of which are foreign-owned firms. “Why should Indian merchants and consumers finance these foreign platforms?” he said in a note. The two companies themselves process over 80% of all UPI transactions.Instead, said Srivastava, the government should subject these companies to a participation fee.He also said that the new policy “appears to address US grievances that UPI and RuPay have hurt Visa and Mastercard”.Lok Sabha leader of opposition Rahul Gandhi on Tuesday afternoon, prior to the government’s announcing the new policy, expressed concern that merchants could ultimately pass the additional cost from MDRs on to individuals. “Where will the fees imposed on shopkeepers ultimately come from? Added to prices, straight out of the customer’s pocket,” he wrote on X.Gandhi also alleged that the move is aimed at appeasing Washington.Last month Srivastava had noted in The Wire that while a zero-MDR policy may not be sustainable given that banks, payment providers and the NPCI have to invest a lot of money into making UPI work smoothly, a general merchant charge may not be the right answer.“… Financing the system does not automatically require a general merchant charge. Alternatives include targeted budgetary support, government incentives, charges on large commercial transactions, cross-subsidisation from financial services and narrowly designed fees applicable only to high-turnover merchants,” he had said.