UPI transaction charges coming soon?

While Govt of India has clarified that there is no plan to charge UPI transactions, I believe the idea is only differed and not suspended. Govt tested public opinion by leaking the news and retracted seeing negative sentiments. Maybe they will continue to work on this idea and roll it out when they feel the time is right. This post shares my thoughts.

 

We've all got used to free UPI transactions and its convenience. However each UPI transaction involves lots of systems and cost.

• UPI service provider like GPay, PayTM etc should manage their apps- need to pay software developers, testers, project managers to build and maintain the apps, and spend on hosting and other expenses.
• Payer’s bank has IT cost to facilitate online transactions 
• Recipient's bank has IT cost to receive funds and credit recipient’s account.
• There is marketing cost to enroll more and more merchants into the system and make consumers sign up
• Cashbacks and other incentives given cost money
• When fraud happens, the transaction fails and customers complain, there is time & effort involved to investigate, fix or rectify the problem, which is a cost to concerned parties
• SMS send for each transaction involves a small cost.

Someone has to pay for these costs in long run. UPI Apps can’t be expected to burn investor money forever. As of now the UPI Apps like Google pay are making some money promoting other brands (like the scratch card you win wants you to buy from certain brands to get some discount) and also might be generating some revenue from the enormous amount of data they have (what is getting sold where, who is spending on what and so on)

Govt is hunting for new and new means to collect tax. No charge= No tax. If UPI transactions could be charged 1% and Govt can get 18% GST on this 1%, govt can make a windfall. in FY 22, there were 46 billion UPI transactions amounting to 84.17 trillion INR. 1% of this is 841.7 billion rupees. 18% of this is 151.5 billion rupees or 151500000000 INR or 15150,00,00,000 or 15150 crore rupees. Once they start charging both customer and merchant (for 100 INR transaction, 101.18 will be debited from your account while the merchant gets only 98.82 INR in his/her account) , this amount will double to 30300 crores. To put this in perspective, total income tax collected this year is 3,69,559 crore. GST on UPI transactions can fetch as much as 10% of what Indians pay as income tax every year. This is a tempting proposition for Govt now that people are hooked to digital transactions.

 

Govt already selectively leaked the information to gauge public response and as of has said there are no such plans to charge UPI transactions. But I am sure Govt will soon come back with some ways to tax people even more.

I think this is what will happen next:

#	Model	Remarks
1	A fixed annual fee- like INR 99 per year	Small amount won’t be proftiable/attractive to service providers, high amount will result in public outcry and reduced active users.   In a family maybe only 1 or 2 will keep UPI active
2	A fixed % on each transaction	Like 1% fee + GST Feels lucrative, but tiny drops make mighty ocean. Consumers and merchants see hundreds of rupees lost in UPI fee & tax every month and will try to switch back to cash
3	A fixed fee for high value transactions	Like 5 Rs for every transaction above 500 INR People may split large transaction into multiple smaller ones or carry cash or use debit cards for large transactions.

Charges on UPI will be induced in some format or other. Some possible ways are

 

First everyone will target merchants. Shopkeeper who gets 100 INR via UPI will be credited only 98.82 INR or something like that- rest 1 rupee and 18 paise will go in UPI charge and GST.

 

Once this is rolled out, shopkeepers will start demanding 2 % extra if customers are paying through UPI. If you pay cash, 100 INR, UPI, 102. Or they would simply increase price of their products and services 2% to avoid direct confrontation with customers paying through UPI- then everyone pays more, even cash customers. The same thing was happening w.r.t credit cards- shops that had good margins (like restaurants) would absorb credit card charges while others like fuel stations, would simply pass the credit card charges to customers, asking them to pay 2.5% extra.

Next consumers also will be charged. Maybe like 5 Rs UPI fee for transactions above 500 INR or things like that. Certain type of payments like utility bills might attract more fee-as UPI apps think consumers might pay for convenience.

 

For a normal consumer, who makes 10 transactions per day of say 100 INR each on an average, daily UPI charge will be around 12 to 13 INR (assuming 1% UPI charge and 18% GST), which adds to 360 to 400 INR per month, which is a substantial amount for middle class people. Going to ATM a few times, keeping cash worth few thousands will be more economical option. Even there Govt is trying to squeeze money from people- ATM withdrawals will be charged beyond 5 transactions, tax was proposed on our own money being withdrawn from banks and more such rules will come in.

 

With that customers would start preferring cash again and use UPI only as last resort. UPI is no doubt an excellent initiative. Even US returned people have acknowledged that this level of digital payment does not exist in the US or Europe. With increased UPI transactions, Govt and Banks are saving lots of money and getting multiple benefits

• Need for cash is reduced, less cost of transporting & loading money into ATMs and branches
• Less number of torn/damaged notes returning to banks for replacement
• More visibility on who is earning how much and spending how much. Lesser chances of black money/tax evasion
• Lesser need for cheques, demand drafts, check processing & settlements
• More transactions mean more GST. Cash transactions may easily evade GST.

So with these benefits, Govt and Banks can definitely bear the cost of UPI transactions and operate without having to charge extra. Debit card transactions were free all these days and same can be applied to UPI. It is pre-existing money electronically transferred between two accounts. If people start preferring cash again, all above benefits and savings will be lost.