GST vs. UPI: How a ₹29 Lakh Tax Notice Sparked Backlash Against Digital Payments in Karnataka

For nearly every second individual staying in a metropolitan city, UPI is the most common mode of payment. From street vendors to local shops, one can find payment QR codes across sectors now. However, a recent step from the authorities in Karnataka has turned the UPI wheel around in the capital city of Bengaluru.

Vendors who displayed QR codes on their carts and shops are now hanging placards that read ‘No UPI, Only Cash’. But what prompted this sudden change? Outlook Business explains in detail:

What Sparked the Protests?

The officials in Karnataka’s Commercial Taxes Department identified 14,000 unregistered traders through their UPI transaction data, who had allegedly received digital payments beyond the threshold that mandates Goods and Services Tax (GST) registration.

As per the GST law, businesses should register for the tax if their annual turnover is above ₹40 lakh for goods or ₹20 lakh for services. It has been reported that many of these traders were handed over notices citing tax arrears that dated back to FY2021-2, with some facing demands worth several lakhs.

Following this action, there was an immediate backlash that led to street vendors refusing UPI payments, fearing that their digital trail could lead to further scrutiny or massive retrospective dues.

Additionally, small traders in the city also threatened a three-day strike from July 23 to raise their voice against the GST notices. As a part of the protest, the traders, including milk vendors and bakery owners, planned to wear black badges while suspending sales of milk and milk-based products on July 23 and 24.

However, following a meeting between trade bodies, including the Federation of Karnataka Chambers of Commerce and Industry (FKCCI) and Chief Minister Siddaramaiah, the vendors called off their strikes on Thursday.

At the meeting, the CM clarified, “Notices were issued only to traders with UPI transactions exceeding Rs 40 lakh” to trigger GST registrations. He also announced that old tax arrears would not be pursued if traders register under the GST and start paying the tax in the future.

Siddaramaiah also pointed out that no taxes would be collected from traders dealing in exempt goods like milk, vegetables, meat, and fruits, but those liable under the law must comply, Indian Express reported.

What's the Issue with Relying on UPI Data for Tax Collection?

Legal experts and tax professionals argue that relying only on UPI transactions to determine a trader’s turnover is flawed. As per an ex-Karnataka tax official, digital credits should not be treated as conclusive proof of income.

“Authorities can’t simply convert UPI credits into turnover figures, they must support it with clear, corroborative evidence,” the official told Times of India.

This is particularly important for vendors operating without proper registration, as many of them have overlapping personal and business transactions in the same account or operate on slim profit margins.

What’s behind the Tax Department’s aggressive steps?

The tax department of Karnataka is currently aiming to meet a ₹1.2 lakh crore revenue target in the 2025–26 period. This is in comparison to ₹93,122 crore tax revenue collected by the state government in FY2023-24. 

Over ₹52,000 crore has been allocated for welfare schemes and legislators are also demanding more for infrastructure. Amidst these expenses, the government is searching for ways to widen its tax base, and one way it is doing so is by plugging revenue leakages through better collection measures.