India’s digital payments revolution, led by UPI, has been a rare policy success story. With over 14 billion transactions monthly, UPI has empowered street vendors, small businesses, and millions of Indians who once relied solely on cash. But now, whispers of a potential transaction tax on UPI payments threaten to undo this progress. If implemented, this move could stifle economic growth, reduce purchasing power, and push India back toward a cash-dominated shadow economy.
In the eight years since its launch, UPI has become the beating heart of India's digital economy. From chaiwalas accepting Rs 10 payments to multinationals settling crore-rupee transactions, this homegrown payments system processes more transactions monthly than all global card networks combined. Now, as policymakers consider slapping a transaction tax on UPI payments, economists warn this could be the financial equivalent of "killing the goose that lays golden eggs."
As the Modi government considers taxing UPI transactions, an unlikely coalition is forming in opposition—from fintech unicorns to opposition-ruled states, and even the prime minister's own digital economy advisors. What was meant to be a routine revenue measure has exploded into a full-blown political and economic debate that could define India's financial future.
It is to be noted that in April, the ministry of finance came out with a circular stating that "The claims that the government is considering levying Goods and Services Tax (GST) on UPI transactions over Rs 2,000 are completely false, misleading, and without any basis. Currently, there is no such proposal before the government." "The government remains committed to promoting digital payments via UPI," it added.
The backbone of India’s digital economy
UPI’s success lies in its zero-cost convenience. Unlike credit cards or wallets, it allows seamless peer-to-peer and merchant transactions without fees. This has driven adoption at an unprecedented scale:
* Rs 20.45 lakh crore processed via UPI in June 2024 (NPCI).
* 40 per cent of retail digital payments now flow through UPI (RBI).
* 30 crore+ users, including small merchants and rural beneficiaries.
A tax—even 0.5 per cent—would disrupt this ecosystem. Imagine a vegetable vendor paying Rs 5 extra on every Rs 1,000 transaction, or a student splitting a Rs 500 bill with friends now losing Rs 2.50 per transfer. These micro-charges add up, discouraging usage.
Behavioural bomb: How Rs 2 tax kills a Rs 3T economy
Why your brain will hate this:
Loss aversion/The mosquito bite effect: Humans feel losses twice as painfully as gains. That Rs 2 tax will hurt more than the Rs 2,000 spent. It’s like a mosquito buzzing in your ear—tiny but infuriating.
Friction fffect: UPI beat cash because it was easier. Add even two seconds of friction? Suddenly pulling out crumpled Rs 50 notes feels simpler.
Anchor trap: Free UPI = mental anchor. Break it → trust shattered. It’s like your favourite restaurant suddenly charging for water. You don’t just pay – you feel cheated.
The unintended consequences of a 'small' tax
Even a seemingly negligible tax, such as 0.1 per cent, could severely undermine financial inclusion by discouraging frequent, low-value transactions — a concern consistently highlighted by Nandan Nilekani, the architect of India Stack. His concern stems from UPI's unique position as the only truly democratic payments system where:
- Street vendors pay nothing to receive digital payments
- Migrant workers send home money without fees
- Small businesses avoid card machine charges
RBI data shows 70 per cent of UPI transactions are under Rs 100. A tax here would:
*Disproportionately hurt the poor (A Rs 0.50 charge on a Rs 100 payment equals a day's mobile data budget for many)
*Revive cash usage (Brazil saw digital payments drop 18 per cent after introducing similar taxes)
*Stunt financial innovation (UPI's zero-cost model enabled India's fintech boom)
The macroeconomic domino effect
Economists fear a UPI tax could trigger three dangerous chain reactions:
The velocity vortex
Money tends to circulate far more quickly in digital form than in cash and taxing such transactions would be akin to placing speedbreakers on an expressway—slowing the very efficiency that makes digital payments valuable.
The informal economy boomerang
Small businesses might find it easier to dodge taxes by slipping back into cash transactions. It’s almost like trying to herd cats: every time the system nudges them forward, some go scampering back. This could shrink the formal economy and reduce GST collections, potentially impacting government revenue streams.
The innovation chill
Fintech startups in India have already faced a slowdown, with total funding halving to about $1 billion in 2024 and transaction volumes dropping by eight per cent. In such an environment, entrepreneurs might think twice before building the next big digital payments app—after all, who wants to invest in a rollercoaster ride when the rules keep changing?
The ripple effect: Less spending, slower growth
Money moves faster in a digital economy. Each rupee spent via UPI circulates quickly, boosting demand. But a tax would:
*Reduce disposable income for low-income users.
* Push small businesses toward cash, defeating transparency goals.
* Slow economic velocity—fewer transactions mean weaker demand for goods and services.
Case Study: When Sweden introduced minor digital payment fees, cash usage rose for the first time in a decade. India cannot afford a similar reversal.
A self-defeating revenue strategy
Proponents argue a UPI tax could generate revenue. But at what cost?
Compliance chaos: Tracking billions of micro-transactions is administratively messy.
Lost GST gains: More cash = less formal spending = lower tax collections.
Contradicts Digital India: After years of pushing "less cash," why penalize digital adoption?
The shadow play: Bureaucrats vs Democracy
The 'stealth tax' blueprint: While the government has clarified there is no formal UPI tax proposal, speculation about internal deliberations persists. It seems that every so often, finance ministry corridors are alive with ideas that could slow down digital payments—almost like a group of accountants playing chess with the country’s wallets, just for sport.
The global card lobby: Global card networks have repeatedly raised concerns about the competitive advantage of UPI and the Indian government’s push for free, instant digital payments. The tussle resembles a quiet, high-stakes boardroom game where incumbents grumble that the new kids on the block are getting all the fun—and none of the fees.
The deep state dilemma: Even as India’s digital infrastructure scales rapidly, some segments of the financial bureaucracy appear to treat it as a privilege rather than a right. One could imagine them as gatekeepers, reluctantly allowing people to enjoy UPI, all while wondering whether they really “deserve” it.
While no politician has officially used the metaphor, it is easy to imagine that charging for a system designed as a free public utility could feel like putting toll booths on a highway halfway through construction. The irony? Citizens have already learned to take the express route—only to find the speed bumps suddenly appearing.
This isn't conspiracy theory - it's policy capture. The same forces once resisted Aadhaar and GSTN. Now they're targeting UPI.
Startup ecosystem in revolt
India's $100 billion fintech sector is pushing back hard:
Founder fury:
"Our investors have paid almost Rs 8,000 crore in taxes just to allow us to come back to India. That is a very stiff shock if the business is not yet at maturity," says Sameer Nigam of PhonePe.
" The tax implications would be over $100 million," pointed out Harshil Mathur if Razorpay.
Investor anxiety:
VC funding for fintech in India has seen a sharp slowdown in 2024, dropping roughly 50–60 per cent compared to previous years (SP Global). Investors are notoriously risk-averse; the idea that rules for digital payments could change overnight has them clutching their calculators like life vests on a stormy sea.
The silent sufferers:
Dukaan (local commerce apps) reports 60 per cent of merchants may return to cash if taxed.
Rural fintechs like Jai Kisan fear losing hard-won trust in digital payments.
Global Precedents: Cautionary tales
Countries that tried similar taxes faced backlash:
* Sweden reversed its digital payment tax after cash usage increased for the first time in 15 years
*Brazil saw P2P transactions plummet after imposing a 0.4 per cent charge
* Nigeria's eNaira failed partly due to transaction fees
The global geopolitical angle
With India leading the Global South's digital payments revolution, the world is watching:
G20 legacy risk: Having championed UPI as a model for developing nations, a tax could undermine India's fintech diplomacy
China contrast: While WeChat Pay charges fees, it's a private system. Taxing public infrastructure sets a worrying precedent.
US tech lobbying: Visa/Mastercard are reportedly pushing for "level playing field" through backchannels
A smarter way forward
Instead of blunt taxation, experts suggest:
Solution 1: The Brazilian model
Exempt first 100 transactions/month
Solution 2: The Aadhaar Playbook
Keep P2P free, charge only merchant transactions above ₹10,000
Solution 3: The Data Dividend
Monetise UPI's $2 billion worth of annual transaction data instead of taxing users.
RBI Deputy Governor T. Rabi Sankar has repeatedly stressed the importance of not messing with systems that already work well. In the same spirit, India’s real-time digital payments ecosystem—dominated by UPI—is running like a well-oiled machine. India has emerged as a powerhouse in real-time digital payments, the world is watching whether we'll nurture or cripple this golden goose.
Instead of taxing UPI, policymakers should:
✔ Expand incentives for merchants to stay digital.
✔ Improve banking infra to support growth.
✔ Target high-value transactions if revenue is needed.
The final verdict
UPI is a rare Indian innovation that works for everyone—from billionaires to street hawkers. Taxing it risks killing the golden goose. It's about who controls India's financial future:
✅ Elected Leaders who built Digital India
❌ Shadow Bureaucrats clinging to 20th century economics
✅ Startups that made India a payments innovator
❌ Global Giants wanting to kill UPI's advantage
“A paisa per transaction might feel negligible—but in a system running at full throttle, even a pebble on the road can cause a crash.”
Jaya Jacob M. is an assistant professor in Commerce, St Thomas College, Kozhencherry, Kerala and Haritha Girish is a faculty in Business, the Woolwich Institute, Dubai Knowledge Park.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.