Karnataka: Other states follow suit as UPI data turns into GST headache for small traders

In a fast-escalating standoff between state tax departments and small businesses, the use of UPI (Unified Payments Interface) is now under intense scrutiny across multiple states. After Karnataka's Commercial Tax Department began sending notices to merchants with digital payment receipts above Rs 40 lakh, four more states, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, and Gujarat have followed suit by requesting similar data from UPI platforms and payment aggregators.

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Traders, especially those in Karnataka, have responded with growing unrest. From local tea stalls to small retail outlets, many claim that the GST registration demand based purely on UPI transaction volumes is both confusing and unfair. Many goods sold by these vendors are either tax-exempt or attract minimal GST. However, the notices are being interpreted as threats, prompting associations to call for a state-wide bandh on July 25. Some shopkeepers have already halted UPI transactions and returned to cash, fearing tax implications.

While the official stance maintains that the notices are meant to verify eligibility for GST registration and not to enforce immediate payments, the damage to digital trust is evident. UPI apps are facing backlash, with merchants unsubscribing from QR code services and soundbox devices. As digital payment companies anticipate a wave of cancellations, concerns grow about the future of digital payments in India’s informal sector.

At the heart of the controversy is the confusion between "turnover" and "taxable turnover." Small merchants say they lack clarity on GST applicability and feel targeted despite thin profit margins. Officials argue that the data will help plug evasion, especially among those using personal bank accounts or multiple QR codes to split receipts.

With over 18 billion UPI transactions monthly, and merchant payments forming nearly 63% of them, the outcome of this face-off could redefine how India balances digital innovation with tax enforcement.