6,000 demand notices to traders for UPI transaction data and Legal Defenses Against GST Notices Based on UPI Transactions
1. Background
In a recent move, a state GST department issued around 6,000 demand notices to traders after analyzing UPI transaction data, alleging that their turnover exceeded GST registration thresholds, despite them not being registered. These notices have triggered widespread confusion and protests among small traders, many of whom argue that UPI receipts include exempt or personal transactions, and do not necessarily reflect taxable turnover. Some traders’ associations have even called for boycotts of digital payments.
This article explores the legal position, available defenses, and relevant doctrines to help affected taxpayers respond effectively.
2. Are UPI Transactions a Valid Basis for GST Notices?
2.1. Section 2(112) of the CGST Act, 2017– Definition of Aggregate Turnover
“aggregate turnover” means the aggregate value of all:
- taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis),
- exempt supplies,
- exports of goods or services or both, and
- inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis, but excludes:
- central tax,
- State tax,
- Union territory tax,
- integrated tax, and
Interpretations
1.Includes exempt supplies: Even though no GST is charged on these, they are counted toward the threshold for registration (₹40L/₹20L).
2. Excludes GST amount: The tax portion itself is not included in turnover.
3. Does not mention mode of receipt: The section does not equate bank or UPI receipts with turnover. Only supplies (as per Section 7) are relevant.
However, UPI receipts may include:
- Personal transfers (from family/friends)
- Non-business income
- Exempt goods (milk, fruits, education, etc.)
- Intra-group transactions
- Advances or deposits not involving “supply”
Using gross UPI credits as a proxy for taxable turnover is flawed and can lead to misclassification and harassment of genuine small traders.
3. Legal Doctrines and Defenses Available to Assessees
3.1. Natural Justice – Section 75(4), CGST Act
- Every assessee has the right to be heard before any adverse decision.
- If a notice lacks reasoning or evidence, it violates natural justice.
- If notice was issued without proper clarification, reasoning, or hearing.
3.2. Doctrine of Legitimate Expectation
- Legal Basis: Based on established administrative conduct.
- Case Law: Union of India v. Hindustan Development Corporation (1993).
- Usage: When traders were not warned or informed about UPI data usage for GST assessment.
3.3. No Penalty Without Mens Rea (Intent)
- Penalty is not automatic.
- It must be proportional and based on intent (mens rea).
- Minor or genuine mistakes without fraudulent intent should not attract penalty.
- Statutory Reference: Section 126 of CGST Act.
- Usage: Penalty cannot be imposed unless fraud, suppression, or intent is established.
3.4. Doctrine of Proportionality & Reasonable Classification
- Notices that ignore exemptions or treat all UPI users alike violate Article 14.
- Doctrine supported by Commissioner v. Hindustan National Glass (2005).
- Generalized treatment of UPI traders violates equality before law.
3.5. UPI ≠ Taxable Turnover
- Section 2(112) defines turnover, not all UPI credits are part of it.
- Schedule I/III and CBIC Circular No. 105/24/2019-GST support exclusion of non-supply receipts.
- UPI receipts may include personal transfer, non business transactions, exempt goods hence Taxable turnover may get reduced.
3.6. Show Cause Notice Must Be Reasoned
- Case Law: M/s D. Y. Beathel Enterprises v. State Tax Officer (2021).
- Usage: Show-cause notices without proper evidence or confrontation are invalid.
4. How Traders Can Respond to Notices
- Do not ignore the notice — reply within the stipulated time.
- Attach documents to support your case:
- Nature of business
- Sales data
- GST exemption proof (if applicable)
- Bank statements with explanations
5. Mention relevant legal grounds listed above.
- Seek assistance from a CA or GST professional if needed.6
6. Conclusion
GST enforcement based on UPI transactions must be nuanced, fair, and legally sound. Using doctrines of natural justice, legitimate expectation, and statutory safeguards, taxpayers have solid grounds to defend themselves against arbitrary or premature notices.
At the same time, traders must maintain proper documentation and be aware of registration thresholds to avoid genuine non-compliance. In this case there is hard to escape from paying Tax unless you prove that the transactions are of personal nature or non-business transactions or exempt turnover, but one can reduce the tax liabilities by using above defending reply.
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Unpaid tax by dishonest taxpayers is an additional tax on honest taxpayers…