Union Budget 2021’s GIFT To The Payments Industry And Overcoming Zero MDR Issues

A slightly modified version of this article was first published on Inc42 Media dated March 23rd, 2021.

The payments industry has had a mixed reaction to the Union Budget¹– disappointment with the unchanged zero MDR stand, but looking forward to the earmarked Rs.1500 crores and the alternative reliefs/boost it may bring. An upcoming scheme is to outline how the funds will be deployed- predictions here range from further support to the Payments Infrastructure Development Fund (‘PIDF’)² to alternative merchant/customer incentives. Also awaited by the payments industry is a fintech policy for the Gujarat International Finance Tec-City (GIFT)³, which was expected sometime post Budget. With the Budget’s promised  support for a ‘world-class’ Fintech Hub there, and the policy reportedly⁴ also having payments companies on its radar to boost infrastructure at GIFT, this is a second promising sign, with possible new avenues for servicing GIFT entities.

The Digital Payments fund and options for incentives

Methods to incentivize digital payments can range from disincentivizing cash payments (2% TDS on specified cash withdrawals⁵), regulatory steps (amending the Income Tax Act⁶ to allow electronic payments), anti-black money measures (no cash payments above Rs.20k for immovable property transactions⁷), typical fiscal/financial incentives (proposed GST cashbacks⁸), etc., as often taken in past budgets. The 2019 Budget’s infamous zero MDR⁹ is another form- regulating MDR, as is mandating digital payments (mandatory UPI and RuPay¹⁰). Even this budget has such incentives via the enhanced tax audit exemption¹¹ to businesses with sales below Rs. 10 crore (previously Rs. 5 crore¹²) and 95% digital transactions.

Turning to the upcoming scheme and its focus on financial incentives, one possibility is direct financial incentives like those previously taken, like Meity’s erstwhile MDR reimbursement scheme¹³, Meity’s BHIM Referral Bonus Scheme¹⁴, BHIM Merchant CashBack scheme¹⁵, state government diesel and petrol subsidies¹⁶, etc. Alternatives could be a focus on infrastructure- be it a one-time boost to the PIDF’s current corpus of Rs. 345 crore, or to further subsidise PoS terminals and other acceptance infrastructure. Phone related subsidies¹⁷ can also help towards building digital infrastructure- via increasing the possibility of phone-based payments or even to act as an ePOS.

While the first line of thought with the earmarked funds is whether it could resolve MDR- the amount of Rs.1500 crore falls short of the required amount¹⁸ (for eg., Rs.2000 crore per year¹⁹ was sought in 2019 to compensate for MDR-free infrastructure). Moreover, this is a one-time allocation only, making an MDR refund perhaps unlikely. At present, several places need attention to further digital payments, be it increasing interoperability, increasing reliability of payments infrastructure, addressing fraud and customer grievance redressal, cybersecurity issues, etc. Steps addressing these play a crucial role towards building consumer confidence and increasing payments penetration thereby.

Despite these, from a financial incentive point of view, outside of MDR reimbursements, customer/ small merchant incentives are perhaps more likely.  Whatever the form the incentives take, two hopes are that unlike zero MDR, these benefit both the merchants/customers and the payments industry equally, and that the benefits target the payments industry as a whole, as opposed to RuPay and UPI alone. This is also given the dependency processing UPI and RuPAY transactions without MDR creates on processing of other forms of payments, in order to absorb the costs incurred.

GIFT City and possibilities for the payments industry

Additional indirect incentives to the payments industry in the current Budget naturally come from incentivizing small businesses (MSME support via reduced/increased customs duty), encouraging small merchant formalization (One Person Companies, etc.), digitization in general (implementing e-courts), etc. A more specific incentive to look forward to is of course the Fintech Hub at GIFT. Following steps like the establishment of the International Financial Services Centre (‘IFSC’) Authority²⁰ last year, comes this year’s additional tax incentives, along with the recent permission to invest in securities from GIFT non-resident entities²¹ via the Liberalised Remittance Scheme (‘LRS’)²².

With its promise for the fintech industry in general, there could be specific benefits to the payments industry as well. The proposed Hub reportedly will aim to support GIFT infrastructure, to ‘service the technological requirements of financial institutions and banks²³’ being set up. The Policy, additionally, might incentivize fintech companies to set up base in GIFT²⁴ and nearby areas, acting as a facilitator and providing support for skill development, technologies, etc. While not much is known yet, there is potential for the payments industry in terms of providing payments processing facilities, cross-border payment solutions, dynamic currency conversion, payroll facilities, other API based banking services, etc. to companies at GIFT.

For example, once bank-fintech partnerships are operationalized, one could see neo banking solutions focused on cross-border trade and remittance. In the meanwhile, one step to bring the fintech benefit to GIFT entities more immediately would be to consider allowing fintech participation in facilitating the recently permitted investments in GIFT securities via the LRS. At present, processing such capital account transactions (via the LRS) is restricted to Authorized Dealer²⁵ banks alone, and non-bank entities like aggregators cannot participate²⁶.

Thus, the Budget has brought at least two good steps for the payments industry to look forward to.

1. Government of India Publications: Budget 2021-2022 Speech of Nirmala Sitharaman Minister of Finance, dated February 1, 2021.
2. RBI Notification: Operationalisation of Payments Infrastructure Development Fund (PIDF) Scheme, RBI/2020-21/81, dated January 05, 2021.
3. Website of Gujarat International Finance Tec-City.
4. Media Report by Kapil Dave: New fintech park proposed by Gujarat for GIFT City, The Times of India, updated on January 28, 2021.
5. Section 194N: Payment of certain amounts in cash, Income-tax Act, 1961.
6. Finance (No. 2) Act, 2019.
7. Section 269SS: Mode of taking or accepting certain loans, deposits and specified sum, Income-tax Act, 1961. 
8. Media Report by Dipen Pradhan: GST Council Approves A Pilot To Give Cashback, Sets Up A Panel To look into MSME Issues, Inc42, dated August 06, 2018. 
9. Section 10A: Bank, etc., not to impose charge for using electronic modes of payment, PSSA, 2007, inserted vide Finance (No. 2) Act, 2019. 
10. Section 119AA: Modes of payment for the purpose of section 269SU, Income-tax Rules, 1962, inserted vide Income-tax (16th Amendment) Rules, 2019. 
11. Clause 11: Amendment of section 44AB, The Finance Bill, 2021. 
12. Section 44AB: Audit of accounts of certain persons carrying on business or profession, Income-tax Act, 1961. 
13. Ministry of Electronics and Information Technology Notification: Subsidizing MDR charges on Debit Cards/BHIM UPI/AePS transactions of value less than or equal to Rs. 2000/-, The Gazette of India : Extraordinary, dated January 02, 2018.
14. Ministry of Electronics and Information Technology Notification: Extension and Modification in the BHIM referral bonus scheme for individuals, dated August 14, 2017.  
15. Ministry of Electronics and Information Technology Notification: Extension and Modification in the BHIM cashback scheme for merchants, dated August 14, 2017.
16. Government of Assam Finance Department Notification, FIF.37/2016/Part-I/22, dated December 21, 2016.
17. Media Report by S Ronendra Singh: Govt looking at subsidising Android phones to boost digital payments, BusinessLine, updated on January 16, 2018.
18. Newsletter: Edition #213, The Ken, dated February 02, 2021. 
19. Media Report: Zero MDR: FinMin says no to banks’ compensation plea, BusinessLine, updated on January 07, 2020. 
20. International Financial Services Centres Authority Act, 2019.
21. RBI Notification: Remittances to International Financial Services Centres (IFSCs) in India under the Liberalised Remittance Scheme (LRS), RBI/2020-21/99, dated February 16, 2021..
22. RBI Notification: Master Direction – Liberalised Remittance Scheme (LRS), RBI/FED/2017-18/3, updated on June 20, 2018.
23. Media Report by Avinash Nair: Explained: What is the status of Gujarat’s GIFT city project?, The Indian Express, updated on February 06, 2021. 
24. Media Report by Kapil Dave: New fintech park proposed by Gujarat for GIFT City, The Times of India, updated on January 28, 2021. 
25. RBI Notification: Master Direction – Liberalised Remittance Scheme (LRS), RBI/FED/2017-18/3, updated on June 20, 2018.
26. RBI Notification: Master Direction – Miscellaneous, RBI/FED/2017-18/14, updated on January 04, 2016.