Following the Karnataka Commercial Tax Department, four other states, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Gujarat have asked for the annual turnover data of merchants from Unified Payments Interface (UPI) apps and payment aggregators, according to a couple of sources.
It is not clear when the other state tax departments will start sending notices to merchants with turnover above Rs 40 lakh annually. As per the government regulations, all merchants with turnover above Rs 40 lakh annually should register for GST.
“This is blowing up, with the traders’ associations getting involved and advising merchants to act in unison in moving to cash as customer preference for UPI remains strong,” said a senior banker who works with UPI apps.
On July 16, small traders across Karnataka - including condiments, bakeries, tea and coffee shops - threatened a statewide shutdown on July 25 in protest against the GST demand notices issued by the Commercial Tax Department.
“We have given the state government time till July 24 to withdraw the notices. If there is no response, traders will go ahead with the bandh on July 25. As a mark of protest, sale of milk-based products will be halted on July 23 and 24,” said Ravi Shetty Byndoor of Karnataka State Karmika Parishat told Moneycontrol.
According to the banking source quoted above, the trade bodies have reached out to the tax department and UPI apps for talks.
The move is likely to further intensify the move towards cash in other parts of the country, similar to what is happening in Karnataka. The GST notices are only asking the merchants to register with the tax department and explain their turnover. It is not a notice to pay tax immediately.
“The escalation is not good for digital payments in the country. This is a tax matter, and the UPI apps, NPCI, or RBI cannot find a solution. The government will have to take a call,” said the senior banker quoted above.
UPI is the country's most popular digital payment method and does over 18 billion transactions in a month, worth over Rs 24 lakh crore. There are an estimated 40 crore unique UPI users in the country.
Interestingly, merchant payments account for around 63 percent of all UPI transactions.
Customers' strong preference for UPI
According to a senior executive with a UPI app, the situation has not escalated because not all merchants have received the notice yet and are holding back, as customer preference for UPI remains strong in Bengaluru and other large urban areas.
“Once that happens, more merchants will likely join the cash bandwagon. Also, there is a lag between the event and merchant action. They want to gauge customer preference as of now. If other states also join Karnataka in sending notices, this will have a big impact,” said a senior executive with the UPI app.
The Karnataka commercial tax department has obtained data from UPI apps and other service providers on payments received by traders between FY 2021–22 and 2024–25. The department has identified 14,000 cases and is sending notices to individuals with UPI receipts exceeding Rs 40 lakh in a financial year.
Asking for UPI transaction data and equating it with GST turnover is not correct, as many grocery and food items do not attract GST and hence, such vendors might not be required to register with the tax department, said a senior banker who looks at digital initiatives for a bank, which works with UPI apps.
“The turnover data does not reflect the composition of goods for which GST is applicable. This move is creating unnecessary panic and will create ill will towards digital payments,” the banker added. The executive pointed out that most small merchants do not understand the difference between turnover and profit.
Merchant pushback worries UPI apps
Meanwhile, the UPI apps are facing a merchant pushback after the Karnataka GST notice spooked many of them from using digital payments.
Prasanna CS, a vendor at KSRTC Mysuru Road Satellite Bus Terminus, said that he has received a notice for Rs 30 lakh. I have stopped accepting UPI payments and now take only cash. I have stopped the subscription for the UPI accepting sound device. Ever since I stopped UPI, my business has dropped. I might have to shut shop and return to my hometown,” he added.
Prasanna pays Rs 1 lakh in monthly rent to KSRTC as rent for the shop, plus 18 percent GST on top of that.
The UPI QR codes have become a very popular payment method among shopkeepers and are being used for most small-value transactions in lieu of cash, as Covid and the lack of change with merchants have changed the customer behaviour over the last four to five years, along with rewards and cashbacks.
“Since last week, after the GST notice news spread on WhatsApp groups, several shopkeepers have been calling up merchant acquirers and asking them to stop subscriptions,” said the senior banker quoted above.
Jayaram Poojari, a shopkeeper in Giri Nagar, a south-west suburb of Bengaluru said that he has received the notice. “My profit margin on products like cigarettes is very low. I have been asked to pay Rs 6 lakh—how am I supposed to manage that? I am still accepting UPI, but the government should explain why only small vendors are being targeted,” he said.
The leading UPI merchant acquirers are Paytm, PhonePe, Google Pay and BharatPe, among others. They charge a monthly fee for the merchant app and other UPI payment enablers like the soundbox and point of sale devices.
“While our sales team started getting calls from shopkeepers from Friday, not many have taken a final decision yet. However, we expect to see many more cancellations over the next few months if this does not de-escalate,” said a senior executive with a UPI app.
One shop, many QRs
Many small merchants prefer UPI over other digital payments as the platform does not charge a merchant commission called Merchant Discount Rate (MDR), which is applied on card payments.
According to bankers and UPI apps, this is likely to push merchants to use their own as well as their relatives' savings bank accounts for receiving UPI payments instead of the merchant's current account. This makes it even more difficult for officials and banks to track payments.
However, Commissioner of Commercial Taxes in Karnataka, Vipul Bansal, said that the department is aware of such tactics and will keep an eye for such activities by large merchants.
In 2023, officials found 30 UPI QR codes and transactions worth Rs 1.47 crore at a popular biryani outlet in Hoskote near Bengaluru.
“GST was introduced to simplify taxes and promote ease of doing business, but aggressive enforcement has created fear among genuine taxpayers,” said Sajjan Raj Mehta, trade activist. “While action against fraudsters is necessary, most traders are honest and need guidance, not harassment. Inspections should be educative, not intimidating. Officers must act as facilitators, not enforcers,” Mehta added.
In January 2025, a Pani Puri vendor in Tamil Nadu was served a GST notice after UPI payments to his stall crossed Rs 40 lakh in a year. Authorities found he hadn’t registered under the TNGST and CGST Acts, despite a turnover in FY 2023-24 that was over twice the GST threshold.
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