No UPI, Only Cash
Digital payments are increasing tax pressure on small vendors, leading to complex compliance and GST checks
Authors
India’s digital payment revolution has transformed the way people transact, from metro cities to rural corners. The Unified Payments Interface (UPI), launched in 2016, has become a staple for millions, including small vendors who embraced QR codes and instant bank transfers. With over 18 billion transactions processed monthly, UPI offers instant, secure, and cost-free payments. For small traders, it remove the need for card machines, reduced cash handling risks, and improved customer convenience. The government actively promoted UPI adoption, linking it to financial inclusion and transparency. QR codes became commonplace—from tea stalls to vegetable carts. For many vendors, UPI wasn’t just a payment method—it was a symbol of progress and trust in the formal economy.
However, this trust was shaken when Karnataka’s Commercial Taxes Department began issuing GST notices to small vendors based on their UPI transaction volumes. The logic was straightforward: if a vendor received more than ₹20 lakh (for services) or ₹40 lakh (for goods) in a financial year, they were liable to register under GST and pay taxes. But the execution raised serious concerns. In one widely reported case, a vegetable vendor in Haveri received a ₹29 lakh notice, despite selling GST-exempt goods. here .Authorities had used UPI inflows as a proxy for turnover, assuming that digital receipts equated to taxable income. This triggered panic across the informal sector. Vendors feared retrospective taxation, penalties, and even eviction from their stalls. Overnight, signs reading “No UPI, Only Cash” began appearing across Bengaluru. The very tool that had empowered small traders was now being seen as a liability.
At the heart of the issue lies a disconnect between digital data and ground realities. Under GST law, businesses exceeding the prescribed turnover thresholds must register and file returns. However, the law does not mandate registration based solely on the mode of payment. Using UPI data as a stand-in for turnover is flawed. Many vendors use the same UPI account for personal and business transactions. They rarely issue formal invoices and often lack accounting support. In such cases, total UPI inflow may not reflect actual taxable sales. Moreover, vendors dealing in exempt goods—like fruits, vegetables, or unbranded staples—are not liable for GST, regardless of turnover. Yet, some notices failed to account for this nuance. While the composition scheme offers a simplified tax regime (1% flat rate), it applies only to registered vendors, leaving many informal traders in a grey zone.
The backlash from vendors has been swift and vocal. In Bengaluru’s markets, traders now discourage digital payments, fearing that every UPI transaction could invite closer inspection. “We started using UPI because customers preferred it. Now we’re being punished for it,” said a shopkeeper near Jayanagar Customers are caught in the middle. Many prefer UPI for hygiene, convenience, and record-keeping. But with vendors reverting to cash, digital momentum is slowing. Some traders report a dip in sales, especially among younger, tech-savvy buyers. Political leaders have responded to the growing unrest. Karnataka’s Chief Minister Siddaramaiah assured that no action would be taken against small vendors unfairly targeted. Opposition leaders called for balanced enforcement that doesn’t penalize those who embraced digital payments in good faith.
The UPI tax dilemma raises broader questions about India’s push toward formalization. While tax compliance is essential for equity and revenue, enforcement must be understanding and sensitive to real-world challenges. If small vendors abandon UPI out of fear, it could stall India’s cashless economy goals. The solution lies in smarter approaches. First, authorities must distinguish exempt goods and services before issuing notices. Second, vendors need to be educated about GST thresholds, registration processes, and available schemes like composition. Third, digital platforms could offer real-time alerts when receipts approach compliance limits. Finally, registration and filing processes must be simplified, especially for micro-businesses with limited resources. Digital payments should be a gateway to inclusion—not a trapdoor into legal complexity.
These recent crises might be an impact of lack awareness regarding tax compliance.
India’s small vendors are the backbone of its informal economy. Their adoption of UPI was a leap of faith—into a system they believed would make life easier and more connected. But recent tax notices have shaken that trust, leaving many to question whether digital visibility comes at too high a cost. This isn’t just a story about GST or UPI—it’s about how we support those at the margins of formalization. For digital progress to be truly inclusive, vendors need clarity, customers need continuity, and platforms must play a role in bridging the gap. Only when all stakeholders work together—with empathy and transparency—can India’s digital economy grow in a way that’s both equitable and enduring.