Will you have to pay extra for every UPI transaction? What govt is saying

The Reserve Bank of India (RBI) has released a discussion paper on 'charges in payment systems' and has asked for feedback on charges on payment systems like UPI, NEFT, RTGS, and others. Though people pay charges when they pay through NEFT or RTGS, the government has clarified that there will be no charges if you use UPI. 

What is the RBI discussion paper all about? RBI's discussion paper is about the charges that are levied on various payment systems like debit cards, RTGS, NEFT, and UPI through which customers like you and me make everyday payments or receive money.

The RBI doesn't have an inclination or has not made a decision to levy charges, but is simply explaining the payment systems that exist in India and is asking for public feedback through 40 questions till October 3, 2022, based on which it would form its future policies.

In our normal lives, we use payment systems like: 

• RTGS or an NEFT for large value transactions (usually businesses use this).
• IMPS or UPI for quick transactions with instant confirmation (like at the grocery store or transferring money to a friend's account or at the restaurant).
• Debit or credit cards (for ATM withdrawals, depositing money, foreign remittances etc). 

Though for us, the transaction is over once we get our goods and pay for them, the same is not true for companies who are involved in this payment ecosystem. The paper asks for feedback on the regulations and pricing of the different payment modes. The discussion paper:

• Gives a breakdown of each payment system (like UPI, RTGS, NEFT, cards systems).
• Explains the number of parties involved, and the costs involved to process each transaction.
• Explains who is bearing what costs and how much costs they can pass on to their customers etc.
• Asks for feedback. 

Why are we talking about charges in the first place? On one hand, it is RBI's duty to ensure faster adoption of the digital economy in the country, while on the other hand, RBI and multiple entities have invested a lot of resources to make the digital payment system successful in India. Like RBI, these entities were formed with capital infusion and with an intention to provide valuable goods and services to customers, earn money and recover their costs. 

RBI brings attention to the question: Since payment systems are essential, who will bear the cost of this service? The paper fears that instead of recovering its invested money in the payment system, RBI might add losses on its balance sheet and absorb the costs. 

Since RBI wants to ensure that the interests of all parties are well managed, hence the paper has invited feedback.

What parties are involved and what are their interests? 

1. Residents (payers and vendors) like you and I are being encouraged to pay through digital modes instead of cash. This has been resonant in Union Finance Minister Nirmala Sitharaman's budget speech for FY 22-23, where she said that the government would support digital payment platforms to make them economical and user-friendly. But we usually end up paying more thanks to additional costs like surcharges and convenience fees which are levied in addition to processing charges. Say you pay Rs 100 for a good/service, the vendor receives only Rs 99.5 because of the costs charged by intermediaries. So RBI wants to make digital transactions cheaper.  

2. Government: Though UPI and RuPay debit card transactions are free for customers and banks, there is a cost incurred to set up the infrastructure, involve banks and run this system efficiently which is being borne by the government for some years now. The government has allocated Rs 200 crore for reimbursing the bank's processing charges this year and in FY 21-22, the allocated budget was Rs 1,500 crore. Though we are yet to understand the 200 crore allocation, the basis seems to be that the government incurs at least Rs 2 for each UPI transaction worth Rs 800. How long will the government bear these expenses? 

3. Card networks and intermediaries:

• RTGS and NEFT payment systems are owned and operated by the RBI.
• IMPS, RuPay, and UPI are owned by the National Payments Corporation of India (NPCI), which is a non-profit entity promoted by banks.
• Card networks are owned by banks like HDFC, ICICI, etc which are profit-maximizing entities.

Since these entities have incurred costs to set up the digital infrastructure, hire manpower to help process transactions 24*7*365 and also need resources, RBI's policy also has to ensure that these companies recover costs and make profits. 

But since costs charged to customers decide profitability for these companies and the general acceptability of digital transactions, RBI wants your feedback.

What has the government clarified? Out of the 6 services that were discussed in depth in RBI's discussion paper, The Ministry of Finance took to Twitter to clarify its stance on one service ie UPI. The ministry tweeted that UPI transactions will not be taxed. Meanwhile, you will continue to pay charges for all other payment modes like NEFT, RTGS, and card systems. 

The Govt had provided financial support for #DigitalPayment ecosystem last year and has announced the same this year as well to encourage further adoption of #DigitalPayments and promotion of payment platforms that are economical and user-friendly. (2/2)

— Ministry of Finance (@FinMinIndia) August 21, 2022

Now that the government has successfully got us hooked out of cash payments and into scanning through QR codes, will the government tax these online transactions in the next few years? What do you think?