Fears of the public shifting to cash because of the merchant fee on UPI transactions of more than Rs 2,000 are “100% misplaced”, government sources said on Thursday, arguing that a Merchant Discount Rate (MDR) already exists on credit and debit cards other than RuPay debit cards and “no one is giving them up”.“How long can someone provide a service for free? We would be killing our golden goose!” an official said, requesting anonymity.“Merchants have always absorbed the MDR on credit cards. But people are still getting Visa, Mastercard, and Amex cards. Why is it that suddenly UPI, an indigenous product that has done so well, is something that merchants can’t pay for when they are paying for all other methods?”The merchant fee on debit and credit cards is significantly higher than what has been proposed on UPI and is broadly in the range of 1-3%.Also Read | Rs 15,000 crore: What the UPI levy will fetch, and why the government is backing itOn the subject of a Goods and Services Tax (GST) of 18% applying on the MDR on person-to-merchant UPI payments, the official said it was hoped that the GST Council “will take a favorable view and be reasonable”.The GST Council is scheduled to meet on October 7. The merchant fee on person-to-merchant UPI transactions of more than Rs 2,000 will begin from October 15. The GST Council is not expected to discuss the indirect tax rate on MDR.The National Payments Corporation of India’s (NPCI) decision that a 0.4% fee will apply on merchants on UPI payments of over Rs 2,000 has led to concerns that shopkeepers will stop accepting UPI as a mode of payment. Consumers, meanwhile, think sellers will pass on the fee to them and increase prices.Story continues below this adOnly 4% of person-to-merchant UPI transactions are for more than Rs 2,000 and will attract a merchant fee. However, this small number of payements account for two-thirds of person-to-merchant UPI payments when they are measured in value terms.All person-to-person UPI payments will remain without any MDR. Payments made via RuPay debit cards, even those of more than Rs 2,000, will attract no MDR.Authorities have repeatedly said they will look to ensure that merchants don’t pass on the fee to consumers, with sources saying on Thursday that the government is willing to talk with the Indian Banks’ Association (IBA) to set up a mechanism through which it can be monitored if shopkeepers are passing on the MDR to buyers.Sources also said the government will speak to traders, including the Confederation of All India Traders (CAIT), about the issue.Story continues below this adThe MDR, which is paid by sellers, is to be split between payments industry players, which includes banks, payment gateways, UPI apps, and other service providers.According to estimates, the annual cost of the UPI infrastructure and transaction settlement is around Rs 20,000 crore. And whille some brokerages estimate that the 0.4% fee on large person-to-merchant transactions, 0.02% on captial market transactions, and a flat Rs 5 fee on certain public services payments could generate upwards of Rs 15,000 crore every year, government officials think the entire cost will not be covered.“The MDR is not a tax. It’s not a cess. The money is not going to the government or the Consolidated Fund of India. It is going to the industry,” the official said.With the MDR collections not expected to cover the full cost of running UPI, the government is likely to continue its subsidy scheme for UPI payments of under Rs 2,000 to merchants with an annual turnover of less than Rs 50 crore.Story continues below this adSince January 2020, there has been no MDR on RuPay debit cards and UPI transactions. This was to promote the adoption of digital payments across the country. To help meet some of the industry’s costs, the government has been subsidising payments of up to Rs 2,000 made to small merchants through its ‘Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M)’. The incentive offered is capped at 0.15% of the transaction value. Large merchants are not covered under this scheme.For 2026-27, government has set aside Rs 2,000 crore for this scheme.“The country has seen a digital payments movement. Yes, some people continue to favour cash. But we can’t force them; we can only gently budge them and show them the benefits of digital payments,” an official said.