GST Council May Grant Small Vendors Relief Amid GST Notice Frenzy, But What If Merchants Discourage UPI Use?

MedianamaAugust 7, 2025

Amid the crackdown on GST (Goods and Services Tax) evasion across Bengaluru, the Commissioner of Central Taxes, Kotraswamy M, stated that the GST Council may grant amnesty from interest and penalty to small vendors who have received GST notices for UPI (Unified Payments Interface) transactions.

This statement comes in the wake of Karnataka’s Commercial Tax Department issuing notices to traders who failed to register for GST or pay the applicable tax, despite exceeding the Rs 40 lakh threshold in UPI receipts, Moneycontrol reported. Following the issuance of over 14,000 notices, many small vendors across the city refused to accept UPI payments. Instead, they began to demand cash from customers.

Clarifying this frenzy, the Commissioner emphasised that the transactions will either be recorded digitally (via UPI) or through banking records. Consequently, businesses with an annual turnover of over Rs 40 lakh for the sale of goods, or over Rs 20 lakh for those of services must register and pay GST, unless exempt.

Digging deeper: UPI’s costly ecosystem

Vendors’ insistence on cash payments slightly backfires on the government’s push for a cashless economy. As per a previous response to a MediaNama RTI, the IT Ministry has spent over Rs 3,600 crore promoting UPI and RuPay between 2021-2024. Recently, the Union Cabinet also approved a Rs 1,500 crore incentive scheme for person-to-merchant (P2M) UPI transactions of up to Rs 2,000 for small merchants. The move aimed to increase UPI penetration across tier III, IV, V, and VI cities.

Besides this, from 2019 onwards, the Centre has waived off the Merchant Discount Rate (MDR) on UPI transactions in a bid to increase the adoption of digital payments. This contrasts with a 2% MDR charged on credit cards and other transactions. Despite multiple representations for MDR reinstatement, the Finance Ministry refuted any such claims.

Notably, the Reserve Bank of India’s (RBI) Governor Sanjay Malhotra recently spoke of how the government shoulders UPI’s cost of maintenance. He argued that the large scale of UPI operations has strained the infrastructure maintained by banks, payment providers, and National Payments Corporation of India (NPCI).

Consequently, Malhotra opined that such costs should be collectively borne or passed on to the user. For context, UPI recorded 19.47 billion transactions worth Rs 25.08 lakh crore in July 2025 alone. Further, as per the RBI’s Annual Report for 2024-25, it accounted for 84% of the total transactions processed in India’s retail payments systems.

Harms for financial inclusion and digital trail

Speaking about government support, the Centre has promoted UPI as a tool for financial inclusion for individuals and small businesses. However, discouraging the usage of this payment technology might undermine this vision, claimed Amol Kulkarni, Director (Research) at CUTS International. “If merchants move back to a cash economy, they are essentially shifting to informal ways of transacting,” he explained.

Kulkarni also spoke of how this diminishes the digital trail. “This trail helped furnish information for credit and other formal financial services. Accordingly, the information on customers would remain thin, and service providers could find it difficult to underwrite and provide them services,” he remarked.

Adding another element, Research Associate at Dvara Research, Manvi Khanna noted how this enables reverse formalisation. Khanna drew parallels with the demonitisation era, when experts believed the digital trail would help improve transparency.

“This digital trail would look good when everything is going well. However, if this data is used against those the government is encouraging to use this technology, it backfires on a trust dimension. Generally speaking, this would push the informal economy more on the sidelines, with them hiding away from visibility. This is exactly the template for what was once anticipated,” she explained.

Likewise, Kulkarni stated that the government’s push for digitalisation to ease the economy is falling through. He referenced how digital payments or UPI are also running into transaction failures and cyber fraud. As per data by the Finance Ministry, UPI transaction fraud rose 85% in FY24, amounting to Rs 1,087 crore. Besides this, the UPI ecosystem has also suffered four outages between March and May 2025, with the NPCI issuing new guidelines to curb such technical issues.

Circling back to the issue of UPI transaction-based GST notices, Kulkarni explained, “This obsession with digitalisation without looking at the broader picture increases costs and compliance burden for citizens and small businesses. It adds insult to the injury because now you are turning or weaponising digitalisation against the same citizens who would ideally benefit from it.”

Political slugfest in full swing

Given the chatter around the GST notices, the conversation also delved into a political blame game. Taking to X, Head of the BJP’s National IT Department, Amit Malviya criticised the Congress government for tormenting small businesses in Karnataka. “The data for UPI transactions is being weaponised to raise arbitrary tax demands… Under GST law, the burden of proof lies with the tax officer—not the trader… This is nothing but a desperate attempt to fund their [Congress’] freebie culture,” Malviya argued.

The situation in the state deteriorated further with traders’ associations calling for a strike on July 25, advocating a boycott of UPI transactions. In response, Karnataka Chief Minister Siddaramaiah explained that old tax arrears linked to UPI payments won’t be pursued. However, he emphasised that the traders must register with the Commercial Tax Department as “everyone needs to be brought within the tax net”.

“In my view, this is a very monstrous exercise, initiating this drive only to promote registration. It’s taking a very long route to conduct the simple activity of registering vendors and formalising the economy,” Khanna opined.

Inaccuracies of UPI transaction data

Speaking of considering UPI-based transactions for annual turnovers, Khanna noted how this could paint an inaccurate picture. She explained that UPI transactions may include non-business inflows like loans or family transfers as well. “All this happens informally in the economy. So there could be a potential miscategorisation,” Khanna added. Likewise, small vendors may present the UPI IDs of different family members as payment options, deceiving the classification threshold, she noted. “To alleviate this issue, vendors must separate business transactions on a separate QR code from personal transactions,” Khanna stated.

Will customers and merchants return to UPI?

Moving forward, unfavourable merchant sentiment toward UPI could draw questions around the potential switch of consumer habits to cash. Opposing this, the anonymous fintech expert claimed that customer propensity to use their preferred payment mode is unlikely to change. “If customers deny paying with cash or lack the avenue to do so in the moment, the shopkeeper will try to find alternative payment methods. Ultimately, a businessman knows he’s here to sell, so they inevitably agrees to the customer’s choice,” the expert noted.

Similarly, many users have condemned vendors’ insistence on cash payments, arguing they won’t aid merchants in GST evasion and would instead pay by UPI. Accordingly, they have also pointed to the ensuing business losses resulting from the enforcement of such mandates.

However, Khanna stated that “cash remains king” in most jurisdictions despite the availability of digital payments. This sentiment is corroborated by The Global Findex Database 2025, which found that 48% of the respondents in South Asia pay by cash out of habit. Alternatively, the report explained that digital payments cannot replace cash until merchants operate in a supportive business environment with affordable and reliable access to the digital ecosystem.

Despite this deterrent effect, Khanna claims that the return to UPI is evident. “The government has intervened timely and tried its best to initiate damage control. Consequently, local vendors that removed their QR codes have reinstalled the same,” she explains.

However, she cautions that this return depends on the kinds of vendors and their personality types. “If someone is very risk-averse, this could create a permanent dent on them,” Khanna explains. Agreeing with this perspective, Kulkarni added that this incident may have a ripple effect on digital adoption. “New merchants may feel wary before onboarding UPI or similar digital systems owing to apprehension about government usage of their transaction data,” he explained.

Meanwhile, users have reported that UPI payments are still reigning across Bengaluru, despite this purported drive. “This cash move appears to be temporary, as dealing with cash has issues like pilferage. If you are a sole proprietor managing all expenses, the back and forth is fine. However, once you add third parties like employees, chances of pilferage or embezzlement increase as well,” the anonymous fintech expert said, opining that this is merely a reactionary response.

What’s the way forward?

From another perspective, Kulkarni recommended a macro vision and revisiting the strategy to tackle tax evasion.

“The major issue here appears to be the rationale behind the government targeting small vendors and merchants, when they are bigger fish to catch about GST-related issues. Across numerous sectors, we have seen a disproportionate or adverse impact on the regulation of smaller entities,” he cautioned.

Accordingly, Kulkarni noted that these priorities don’t make sense from the perspective of limited state capacity. “An inconvenience to the merchant is inevitably passed on to consumers, a situation the state government would likely dislike,” he argued.

Further, Kulkarni explained that restoring merchant confidence should remain the government’s top priority. “They should be upfront about the data types they are collecting and their use cases,” he concluded.

Elsewhere, the anonymous expert referenced the Tax Commissioner’s point about the lack of digital literacy for small vendors.

“The reality is not that merchants don’t want to pay. The problem is that despite the basic education, they often fail to understand the complexity and end up getting harassed by their agents or middlemen, to end up paying more than the stipulated amount. Another challenge is not how vendors pay the tax, but how they respond to such notices and remain answerable to the government. So, the challenge for the government is simplifying this process and educating vendors,” the expert opined.