Tax amendment bill passed in Lok Sabha: What changes for UPI transactions, offshore fund norms

Lok Sabha Approves Comprehensive Tax and Payment Laws Amendment Bill

Theindiapostdaily.com – On 6 August, the Lok Sabha approved legislation designed to modify the Payment and Settlement Systems Act of 2007. This new law empowers authorities to enable financial institutions and service operators to impose fees on transactions conducted via unified payments interface and other designated electronic channels.

The legislative measure sailed through without debate despite opposition objections. Its primary objective involves eliminating the current statutory barrier that stops banks and payment service providers from collecting Merchant Discount Rate on approved electronic payment methods.

Shifting the Digital Payment Landscape

While real-time gross settlement and national electronic funds transfer operations already involve service fees, unified payments interface transfers have remained cost-free until now. The proposed legislation introduces the possibility of merchant fees on certain UPI operations, signaling a potential departure from the nation’s zero-charge digital payment system.

Currently, financial entities and payment-system operators are prohibited from imposing direct or indirect costs on consumers utilizing UPI and RuPay debit cards. Under the new framework, the central government gains authority to determine, via official notification, which electronic payment channels or specific transactions should continue operating without fees.

Although the legislation does not immediately establish a merchant discount rate or define particular charges, it provides the necessary legal foundation for future modifications to the zero-MDR structure. The government’s strategy focuses on implementing modest fees for digital payment services targeting consumers and small enterprises, while simultaneously establishing a sustainable financial model for banks, payment service providers, and infrastructure companies supporting the digital payments sector.

Attracting Global Investment and Simplifying Fund Operations

The legislation seeks to facilitate the relocation of fund management companies to India by reducing the number of requirements these entities must fulfill to prevent their worldwide earnings from being subject to Indian taxation. Analysts anticipate that numerous international fund managers will establish operations in the country, contributing valuable activities and employment opportunities.

This provision extends across the entire territory, encompassing the International Financial Services Centre, thereby offering location flexibility for fund managers. Additionally, investors in real estate investment trusts and infrastructure investment trusts receive relief through the continuation of tax-free dividend distributions even when operating companies transition to the newer, streamlined tax framework.

Previously, such dividend exemptions applied only when operating companies maintained the older tax regime. As businesses progressively adopt the simplified system, investors faced the prospect of losing this advantage. The new rules safeguard small investors while encouraging further capital deployment into real estate and infrastructure sectors.

Streamlined Data Center Regulations

The amendment also introduces more straightforward guidelines for data center operations. The 2026-27 budget initially granted tax exemptions until 2047 to foreign cloud service providers utilizing Indian data centers, though this benefit came with multiple layers of governmental notifications and approvals. The proposed legislation simplifies these procedural requirements.

Broader Legislative Context

The Taxation and other Laws (Amendment) Bill, 2026 supersedes the ordinance issued on June 5, which had extended income tax exemptions for foreign portfolio investors regarding interest earnings and capital gains derived from government securities investments.

Finance Minister Nirmala Sitharaman presented the legislation to the Lok Sabha on 4 August and moved it for consideration when the House reconvened at 2 pm following an earlier adjournment. The measure was approved through a voice vote amid considerable discussion in the chamber.

Through this comprehensive amendment, the government has modified three key pieces of legislation: the Payment and Settlement Systems Act of 2007, the Income Tax Act of 2025, and the Finance Act of 2026. Officials emphasize that these changes aim to position India as an increasingly appealing and stable destination for international capital, manufacturing enterprises, and business operations seeking long-term presence in the country.