In a significant move to enhance tax compliance, the Karnataka Commercial Taxes Department has issued notices to traders and businesses whose Unified Payments Interface (UPI) transactions exceed ₹20 lakh for services or ₹40 lakh for goods in a financial year. This initiative, aimed at ensuring adherence to the Goods and Services Tax (GST) regulations, has sparked discussions among small vendors and traders across Bengaluru and Karnataka. Here’s everything you need to know about this development, its implications, and how businesses can stay compliant.

Karnataka’s Crackdown on Unregistered Traders

The Karnataka Commercial Taxes Department has leveraged UPI transaction data from 2021-22 to 2024-25 to identify approximately 14,000 unregistered traders who have surpassed the GST registration thresholds. According to Section 22 of the GST Act, 2017, businesses with an annual turnover exceeding ₹40 lakh for goods or ₹20 lakh for services are mandated to register for GST, regardless of the payment mode—be it UPI, cash, POS, or bank transfers.

Joint Commissioner Meera Suresh Pandit clarified, “If a person has transacted over ₹20 lakh for services or ₹40 lakh for goods in a year through UPI, it indicates that they may be liable to register under GST.” These notices are not final tax demands but preliminary proposals, allowing traders to provide clarifications and documentation to verify their turnover or claim exemptions.

Why UPI Transactions Are Under Scrutiny

UPI, India’s most popular digital payment method, has seen exponential growth, processing ₹24.03 lakh crore in June 2025 alone. Its widespread adoption, especially among small vendors and kirana stores, has made it a valuable tool for tax authorities to track business turnover. The department’s Services Analysis Wing uses UPI data as an indicator of potential GST liability, although it acknowledges that UPI transactions may not reflect the full turnover, as businesses often receive payments via cash, cards, or net banking.

However, this move has led to concerns among traders, with some alleging that not all UPI credits reflect business income. Personal transactions, such as family loans, may be mistakenly flagged. To address this, the department encourages traders to submit invoices, sales records, or proof of exempt goods (e.g., milk, vegetables, or fruits) to clarify their status.

Impact on Small Businesses and Vendors

The GST notices have caused a stir in Bengaluru, with some vendors shifting to “No UPI, Only Cash” signs to avoid scrutiny. However, the Commercial Taxes Department has emphasized that switching to cash does not exempt businesses from GST liability if their turnover exceeds the threshold. Non-compliance can lead to penalties, interest on unpaid taxes, and potential legal repercussions.

For instance, a vegetable vendor reportedly received a ₹29 lakh GST notice for UPI transactions worth ₹1.63 crore over four years, highlighting the scale of the crackdown. In response, trade bodies like the Federation of Karnataka Chambers of Commerce and Industry (FKCCI) met with Chief Minister Siddaramaiah, who assured that notices target only those with significant UPI transactions and that arrears will not be pursued if traders register and comply moving forward.

Exemptions and Compliance Options

The department has clarified that businesses dealing in exempt goods, such as milk, bread, fruits, or vegetables, are not liable for GST, provided they submit proper documentation. Additionally, small businesses with turnovers below ₹1.5 crore can opt for the Composition Scheme, paying a reduced GST rate of 1% (0.5% SGST + 0.5% CGST) with simplified filing requirements.

Traders receiving notices are advised to:

• Visit their jurisdictional GST office with relevant records, such as invoices or sales data.
• Provide proof of exempt goods or non-taxable transactions (e.g., personal loans or gifts).
• Register for GST if their turnover exceeds the threshold to avoid penalties.

No GST on UPI Transactions Themselves

The Finance Ministry has clarified that no GST is levied on UPI transactions, debunking rumors of an 18% tax on transactions above ₹2,000. GST applies only to service fees, such as the Merchant Discount Rate (MDR), which has been waived for person-to-merchant (P2M) UPI transactions since January 2020. Thus, individual users face no direct GST burden on UPI payments, though merchants may face compliance costs.

What This Means for Businesses

This initiative reflects Karnataka’s push to meet its ₹1.20 lakh crore revenue target for 2025-26 while promoting transparency in the digital economy. The department estimates that registering unregistered traders could yield an additional ₹10,000 crore in revenue. However, small businesses fear harassment and unmanageable tax arrears, prompting calls for more awareness campaigns and simplified compliance processes.

To avoid penalties, businesses should:

• Maintain accurate records of all transactions, digital or cash.
• Register for GST if their turnover exceeds ₹20 lakh (services) or ₹40 lakh (goods).
• Use platforms like LEDGERS for streamlined invoice reconciliation and GST compliance.

The Road Ahead

The Karnataka GST crackdown underscores the growing role of digital payment data in tax enforcement, a trend that may spread to other states. While the move aims to formalize the economy, it has sparked debates about balancing compliance with ease of doing business. Traders are urged to comply promptly, seek guidance from tax professionals, and leverage digital tools to manage their obligations effectively.

For more information on GST registration and compliance, visit the official GST portal or consult a tax expert. Stay informed, stay compliant, and keep your business thriving in India’s digital economy.