Small Shop Vendors Abandon UPI & Digital Payments due to GST Notices

“Cash is making a comeback on the streets of Bangalore” — I saw this headline in the newspaper and thought, Wait, what year is it?!

Just yesterday, I overheard a bakery uncle say, “No UPI for the next 3 days. Only cash!” That got me curious.

Across Bengaluru and Mysuru, small vendors are suddenly rejecting digital payments. Why? Because they’re receiving GST notices based on UPI and bank transactions, with some tax demands running into lakhs, even for those selling exempt goods or not registered under GST.

Over 14,000 unregistered traders in Karnataka—primarily in Bengaluru and Mysuru—who had UPI transactions exceeding ₹40 lakh in a financial year were served GST notices by the state’s Commercial Taxes Department.

In protest, unregistered traders have formed a new forum under the Karnataka Karmika Parishat (KKP) and announced a two-day strike on July 23 and 24, followed by a statewide shop closure on July 25.

This situation has created panic in the market and pushed us back to GST fundamentals — supply, levy, and registration, these fundamentals, along with relevant statutory provisions and key judicial pronouncements, will be further discussed in this article

Meanwhile, it is important to acknowledge the state’s response. The Karnataka government launched the ‘Know GST’ campaign, an outreach initiative aimed at creating awareness and easing trader concerns. The first workshop was held in Koramangala, Bengaluru, on July 22, 2025.

RELEVANT STATUTORY PROVISIONS APPLICABLE:

Registration under GST:

Under the Goods and Services Tax (GST) regime, registration is a fundamental compliance requirement. Section 22 of the Central Goods and Services Tax (CGST) Act, 2017 lays down the threshold limits for mandatory registration of suppliers based on their aggregate turnover.

Who is liable to register under GST?

According to Section 22, every supplier is required to obtain GST registration in the State or Union Territory from where they make taxable supplies of goods or services or both, if their ‘aggregate turnover’ in a financial year exceeds ₹20 lakhs.

This limit applies to all states except special category states, where the threshold is ₹10 lakhs.

Enhanced Threshold for Exclusive Supply of Goods:

The government may enhance this limit to ₹40 lakhs (on a State’s request and GST Council’s recommendation) for suppliers exclusively engaged in the supply of goods, subject to prescribed conditions.

As per Notification No. 10/2019 – Central Tax, dated 7th March 2019, the GST registration threshold limit for suppliers exclusively engaged in the supply of goods was enhanced from ₹20 lakhs to ₹40 lakhs, effective 1st April 2019, subject to certain conditions. Karnataka is among the states that have adopted this enhanced threshold.

However, it is important to note that this ₹40 lakh threshold does not apply to suppliers dealing in specific notified goods such as ice-cream, pan masala, and tobacco products—items typically sold in small retail or Kirana stores.

Businesses must carefully verify their aggregate turnover and the nature of goods supplied to determine their eligibility under the enhanced limit.

This brings us to the question of what is Aggregate turnover under GST?

Section 2(6) of the CGST Act, 2017 defines Aggregate turnover under GST and accordingly Aggregate turnover, refers to the total value of all outward supplies made by a person having the same Permanent Account Number (PAN) on an all-India basis.

Now it is important to understand what is included in the aggregate turnover and what’s not:

In brief, GST is levied only on the turnover exceeding the threshold limit of ₹20 lakh or ₹40 lakh, as applicable. This means that the initial exempted threshold is not subject to tax, and tax liability arises only on the portion of taxable supplies exceeding the threshold. [ this does not apply to supplier seeking voluntary registration under GST ]

Once a supplier’s turnover crosses the prescribed threshold limit, they are required to obtain GST registration and pay tax on their value of taxable supplies of goods and services and at the applicable rates as per the provisions of the CGST Act, 2017.

Before examining what constitutes a taxable supply of goods or services (or both), it is important to note that ‘money’ is expressly excluded from the definitions of both ‘goods’ and ‘services’ under the GST law.

Accordingly, a transaction involving only receipt money does not qualify as a supply and is not subject to GST. However, any activity involving the use or conversion of money—for a separate consideration—is treated as a service under GST.

From this definition, it is clear that money itself does not fall within the scope of ‘goods’. Therefore, reverting to our discussion, a mere transaction in money—such as those reflected in UPI transaction details—cannot be regarded as a supply of goods or services under GST and thus falls outside the GST tax net.

What is ‘SUPPLY’ under GST?                                          

Section 7 of the CGST Act, 2017 outlines the scope of supply, and for any transaction to qualify as a supply under GST, it must satisfy three key elements:

1.There must be a supply in any form including sale, transfer, barter, exchange, license, rental, lease or disposal,

2. It should be for a consideration [ any payment made or to be made—in money or in any other form], and

3. It must be in the course or furtherance of business.

In light of the above, a key question arises—can the statement of UPI transactions alone establish that such transactions are made in the course or furtherance of business? Even if they are, can these transactions sufficiently indicate whether the underlying supply is taxable or exempt under GST?

CAN UPI TRANSACTION HISTORY/STATEMENT BE A VALID DOCUMENT TO INVOKE TAX AND ISSUE NOTICE?

To some extent, it is understandable that tax authorities are now tapping into long-overlooked areas to boost revenue collection — notably by ONLY relying on UPI transaction history rather than bank statements, which typically reflects all financial activity.

This shift seems to stem from a practical assumption that UPI payments represent consideration received for the supply of goods or services, potentially triggering GST registration requirements.

This brings us to an important question — CAN UPI TRANSACTIONS DATABASE ALONE FORM THE BASIS FOR ISSUING A NOTICE OF TAX LIABILITY?

UPI records show only payment flows but don’t specify the nature of the underlying transaction (whether it relates to taxable supplies, exempt supplies, loans, refunds, or personal transfers, account to account self-transfers). Payments being merely flow of money doesn’t constitute consideration unless such payment are received for a supply made in course of business.

Tax liability under GST depends on the value and nature of supplies as defined in the law, not just on the receipt of money.

Other supporting documents like invoices, contracts, bank statements, and accounting records are essential to establish taxable turnover and confirm the transaction’s nature.

AID OF JUDICIAL PRONOUNCEMENTS IN THIS REGARD :

Whilst there are no direct case laws or verdicts specifically addressing UPI-based issues, courts and tribunals have consistently held that it is a settled position in law that income reflected in Income Tax Returns or balance sheets is not a valid basis for determining service tax liability without first establishing the nature of the service and the purpose for which the income is received.

This same analogy applies here — UPI transactions, by themselves, cannot be considered sufficient to invoke tax liability without establishing the nature of the service and its taxability.

No recovery on presumption – Hon’ble CESTAT in Kush Constructions Vs CGST NACIN 2019(24) GSTL 606 (Tri-All) held that Revenue cannot raise demand on the basis of such difference without examining the reasons and without establishing the entire/part amount received by the appellant as reflected in the said returns in the Form 26AS is consideration for taxable services provided.

Hon’ble CESTAT ( Tri- Delhi ) in the case of  Deltax Enterprises Vs CCE, Delhi 2018( 10) GSTL 392   had elaborated that “no service tax liability can be fastened on an unidentified service. There is no provision for such summary assumption under the Finance Act,1994. Thus, Assessment cannot be extended solely on the income tax return without identifying the specific taxable service.”

Further, the burden of proof of the taxability should always be on the revenue [ tax authorities/bodies], Brindavan Beverages – 2007 (213) E.L.T. 487 (S.C.) contends that the SCN is issued merely on the basis of assumption and presumption without considering the actual factual matrix.

ADJUIDCATION ASPECT – ASSESSMENT OF UNREGISTERED PERSONS UNDER GST:

It is important to understand the relevant provisions under the GST law that empower tax authorities to issue notices. Section 63 of the CGST Act, 2017 deals with the assessment of unregistered persons.

Section 63 of the CGST Act r/w rule 100 of the CGST Rules, 2017 provides that:

• If a person is liable to register under GST but fails to do so, or
• Then, the GST officer can estimate the tax due and pass an assessment order based on their best judgment.
• This assessment must be completed within 5 years from the due date of filing the annual return for the year in question.
• Before passing any order, the officer must give the person a chance to be heard.
• The proper officer is required to issue a notice in Form GST ASMT-14, clearly stating the grounds for proposing assessment on a best judgment basis. A summary of this notice SHALL also be served ELECTRONICALLY in Form GST DRC-01.
• After allowing the person 15 days to submit a reply, if any, the officer may proceed to pass an assessment order in Form GST ASMT-15, and a summary of the order shall be uploaded electronically in Form GST DRC-07.

Further section 70 of the CGST Act,2017 deals with powers to summon:

• A GST officer has the authority to summon ( call ) any person to appear during an inquiry to give evidence or provide documents or other relevant information.
• This power is on par to that of a civil court under the Code of Civil Procedure, 1908. Such proceedings are considered judicial in nature, and any false statement or misconduct may attract penalties under the Indian Penal Code.

It is crucial to note that, KARNATAKA GST AUDIT MANUAL provides specific guidelines to the proper officers for the assessment of unregistered persons. A snapshot of the relevant section is provided below:

In context to the present discussion, where a notice has been issued solely on the basis of UPI transaction data, it is important to note that the law requires the person to be given a fair opportunity to be heard before any assessment is finalized.

According to guidelines of the GST manual, any estimation of tax liability must be grounded in clear evidence of a taxable supply, rather than relying solely on digital payment flows, which may include non-taxable or personal transactions. The proper officer is required to establish the taxability of the transaction for which establishing the nature of supply/business and its implication under GST has to be established.

Furthermore, it is important that any notice or order clearly establish evidence for basis of the proposed liability, as clarity and specificity are essential for ensuring transparency and facilitating an informed response from the taxpayer.

Having discussed the assessment of unregistered persons, we now turn to the steps suppliers can take in such situations

KEY STEPS THAT THE SUPPLIERS CAN TAKE:

While the revenue authorities perform their duties, it is equally important for suppliers to understand and take the necessary key steps to ensure compliance and protect their interests.

1.Don’t panic :

Don’t panic when you receive the notice. It is an opportunity to explain why GST liability may not apply in your case; any recovery proceedings will NOT be initiated at the preliminary stages or assessment level.

2. Review the Show Cause Notice (SCN)/ Assessment Notice :

Carefully verify whether the SCN clearly presents the evidence and legal basis for alleging tax liability. Also ensure that the notice is valid, with the DIN [ Document Identification Number ] and other essential details correctly recorded.

3. Check for Exemptions:

Determine whether the goods or services involved are exempt from GST vide notifications issued time to time, which would mean no tax liability.

4. Separate Personal and Business Transactions:

Distinguish between personal UPI or bank transactions and actual business-related receipts.

5. Categorize Transactions:

Identify which payments relate to taxable supplies and which are non-supply cash flows such as loans, reimbursements, or gifts.

6. Know the Threshold Limits:

Be aware that GST registration is mandatory only if your aggregate turnover exceeds ₹40 lakhs (for goods) or ₹20 lakhs (for services) annually.

7. Opportunity to Be Heard:

You will be given a fair chance to present your explanation before any decision is made or proceedings initiated.

8. Stay Updated:

Keep yourself informed about the workshops and awareness programs conducted by the state government and also any preliminary relief that would be discussed in upcoming GST council meeting.

9. Educate Your Peers:

Many small vendors may be unaware of GST rules and recent developments. Sharing your knowledge can help them understand their obligations and respond better to notices, benefiting the entire business community.

10. Take Legal Help:

If you receive a GST notice or have doubts about your tax liability, consult a qualified legal or tax professional to ensure your rights are protected and you respond appropriately.

While the broader digitalization drive has actively encouraged citizens to adopt cashless modes of transaction, it has not been equally matched by efforts to educate taxpayers on the potential regulatory and tax implications of such digital payments in the context of day-to-day business.

The sudden GST adjudication drive of invoking tax liability on these vendors might  place an excessive litigation and compliance burden on small and middle-scale businesses, It raises genuine concerns about the practicality of GST compliance for small suppliers such as vegetable vendors, NGOs, and Kirana shops.

Even if these small-scale vendors are required to register under GST on basis of turnover limit and nature of supply and its tax levy under GST, recovering large amounts of tax along with interest and penalties could block their working capital.

Since small businesses play a vital role in employment and economic growth, overburdening them may slow overall progress. Therefore, the government should introduce relief schemes to support small vendors, encouraging compliance and fostering a stronger, more inclusive economy there could be schemes that provide preliminary and consequential relief to encourage small vendors to register under GST.

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Disclaimer:

This article is intended for informational purposes only and does not constitute legal, tax, or professional advice.